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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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    1. Intergenerational Redistribution in the Great Recession
      by Christian Zimmermann in NEP-DGE blog on 2011-04-18 02:10:59

    Citations

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    Cited by:

    1. Hull, Isaiah, 2017. "Amortization requirements and household indebtedness: An application to Swedish-style mortgages," European Economic Review, Elsevier, vol. 91(C), pages 72-88.
    2. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2013. "Life cycle patterns and boom-bust dynamics in U.S. housing prices," Economic Synopses, Federal Reserve Bank of St. Louis.
    3. Makoto Nakajima, 2013. "The diverse impacts of the great recession," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 17-29.
    4. Kimball, Miles S. & Shapiro, Matthew D. & Shumway, Tyler & Zhang, Jing, 2020. "Portfolio rebalancing in general equilibrium," Journal of Financial Economics, Elsevier, vol. 135(3), pages 816-834.
    5. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    6. Hull, Isaiah, 2015. "The macro-financial implications of house price-indexed mortgage contracts," Economics Letters, Elsevier, vol. 127(C), pages 81-85.
    7. James B. Bullard & Aarti Singh, 2016. "Incomplete Credit Markets and Monetary Policy with Heterogeneous Labor Supply : a presentation at Bank of Korea 2016 Conference, Employment and Growth, Seoul, Korea, May 30, 2016," Speech 270, Federal Reserve Bank of St. Louis.
    8. Sule Alan & Thomas Crossley & Hamish Low, 2012. "Saving on a Rainy Day, Borrowing for a Rainy Day," Koç University-TUSIAD Economic Research Forum Working Papers 1212, Koc University-TUSIAD Economic Research Forum.
    9. James B. Bullard, 2012. "Comments on “Housing, monetary policy, and the recovery” by Michael Feroli, Ethan Harris, Amir Sufi, and Kenneth West," Speech 192, Federal Reserve Bank of St. Louis.
    10. Yanbin Chen & Fangxing Li & Zhesheng Qiu, 2013. "Housing and Saving with Finance Imperfection," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 207-248, May.
    11. Aubhik Khan, 2016. "Aggregate Fluctuations in a Quantitative Overlapping Generations Economy with Unemployment Risk," 2016 Meeting Papers 1468, Society for Economic Dynamics.
    12. Andrew Glover, 2018. "Aggregate Effects of Minimum Wage Regulation at the Zero Lower Bound," 2018 Meeting Papers 1285, Society for Economic Dynamics.
    13. Orrego, Fabrizio, 2011. "Demografía y precios de activos," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 22, pages 83-101.
    14. Noëmie Lisack & Rana Sajedi & Gregory Thwaites, 2019. "Population Ageing and the Macroeconomy," Working papers 745, Banque de France.
    15. Azariadis, Costas & Bullard, James & Singh, Aarti & Suda, Jacek, 2019. "Incomplete credit markets and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 83-101.
    16. Glover, Andrew, 2019. "Aggregate effects of minimum wage regulation at the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 114-128.
    17. James B. Bullard, 2014. "Income inequality and monetary policy: a framework with answers to three questions," Speech 235, Federal Reserve Bank of St. Louis.
    18. Hugo Benítez-Silva & J. Ignacio García-Pérez & Sergi Jiménez-Martín, 2015. "The Effects of Employment Uncertainty, Unemployment Insurance, and Wealth Shocks on the Retirement Behavior of Older Americans," Working Papers 2015-06, FEDEA.
    19. John Gardner, 2020. "Intergenerational altruism in the migration decision calculus: evidence from the African American Great Migration," Journal of Population Economics, Springer;European Society for Population Economics, vol. 33(1), pages 115-154, January.
    20. Geppert, Christian & Ludwig, Alexander & Abiry, Raphael, 1970. "Secular Stagnation? Growth, Asset Returns and Welfare in the Next Decades: First Results," MEA discussion paper series 201605, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    21. Dominik Menno & Tommaso Oliviero, 2014. "Financial Intermediation, House Prices and the Welfare Effects of the U.S. Great Recession," CSEF Working Papers 373, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 04 Oct 2016.
    22. Xu, Shaofeng, 2016. "On the welfare cost of rare housing disasters," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 301-318.
    23. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 237-309, Elsevier.
    24. Bridget Terry Long, 2014. "The Financial Crisis and College Enrollment: How Have Students and Their Families Responded?," NBER Chapters, in: How the Financial Crisis and Great Recession Affected Higher Education, pages 209-233, National Bureau of Economic Research, Inc.
    25. Aubhik Khan, 2017. "Large Recessions in an Overlapping Generations with Unemployment," 2017 Meeting Papers 1559, Society for Economic Dynamics.

    More about this item

    Keywords

    Asset prices; Great Recession; Overlapping generations; Aggregate risk;

    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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