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"We're all in this together"? A DSGE interpretation

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  • Richard McManus
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    Abstract

    The recent global economic downturn has resulted in hardship for many individuals and the unequal distribution of this hardship across agents is frequently debated. This paper constructs a small scale New Keynesian DSGE model to test whether individuals suffer to similar degrees during recessions: in effect testing the common political mantra `we're all in this together'. It does this by including heterogeneity in the actions of households through their access to capital markets distinguishing those with full access (Ricardian agents) from those with no access (rule-of-thumb agents). In aggregate welfare movements as a result of recessionary shocks are small but this hides a big divergence with the credit constrained signi cantly losing. There is a redistribution of welfare from non-Ricardian to Ricardian households from the shock, and under reasonable calibrations, the latter are seen to gain at the expense of the former.

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    Bibliographic Info

    Paper provided by Department of Economics, University of York in its series Discussion Papers with number 13/08.

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    Date of creation: May 2013
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    Handle: RePEc:yor:yorken:13/08

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    Keywords: Cost of business cycles; rule-of-thumb consumers; welfare; heterogeneity;

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