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Intergenerational Redistribution in the Great Recession

Author

Listed:
  • Andrew Glover
  • Jonathan Heathcote
  • Dirk Krueger
  • Jose-Victor Rios-Rull

Abstract

We construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices. We use a calibrated version of the model to quantify how the welfare costs of big recessions are distributed across different household age groups. The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages. Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline 2.4 times as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is close to welfare neutral for households in the 20?29 age group, but translates into a large welfare loss of more than 8% of lifetime consumption for households aged 70 and over.

Suggested Citation

  • Andrew Glover & Jonathan Heathcote & Dirk Krueger & Jose-Victor Rios-Rull, 2014. "Intergenerational Redistribution in the Great Recession," Staff Report 498, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:498
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset prices; Great Recession; Overlapping generations; Aggregate risk;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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