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Intergenerational Redistribution in the Great Recession

  • Andrew Glover
  • Jonathan Heathcote
  • Dirk Krueger
  • José-Víctor Ríos-Rull

In this paper 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 severe 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, as observed in the data. 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 more than twice as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is approximately welfare-neutral for households in the 20-29 age group, but translates into a large welfare loss of around 10% of lifetime consumption for households aged 70 and over.

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File URL: http://www.nber.org/papers/w16924.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16924.

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Date of creation: Apr 2011
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Handle: RePEc:nbr:nberwo:16924
Note: EFG
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  1. Attanasio, Orazio & Kitao, Sagiri & Violante, Giovanni L., 2007. "Global demographic trends and social security reform," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 144-198, January.
  2. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1996. "Asset pricing with idiosyncratic risk and overlapping generations," Economics Working Papers 405, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 1999.
  3. Karl Schmedders & Felix Kubler, 2012. "Life-Cycle Portfolio Choice, the Wealth Distribution and Asset Prices," 2012 Meeting Papers 536, Society for Economic Dynamics.
  4. John Y. Campbell & Yves Nosbusch, 2006. "Intergenerational Risksharing and Equilibrium Asset Prices," NBER Working Papers 12204, National Bureau of Economic Research, Inc.
  5. Kamila Sommer & William Peterman, 2013. "How Well Did Social Security Mitigate the Effects of the Great Recession?," 2013 Meeting Papers 1150, Society for Economic Dynamics.
  6. Miyazaki, Kenji & Saito, Makoto & Yamada, Tomoaki, 2010. "On The Intergenerational Sharing Of Cohort-Specific Shocks On Permanent Income," Macroeconomic Dynamics, Cambridge University Press, vol. 14(01), pages 93-118, February.
  7. Meh, Césaire A. & Ríos-Rull, José-Víctor & Terajima, Yaz, 2010. "Aggregate and welfare effects of redistribution of wealth under inflation and price-level targeting," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 637-652, September.
  8. Emi Nakamura & Jón Steinsson & Robert Barro & José Ursúa, 2013. "Crises and Recoveries in an Empirical Model of Consumption Disasters," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 35-74, July.
  9. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  10. Felix Kubler & Johannes Brumm, 2013. "Applying Negishi's method to stochastic models with overlapping generations," 2013 Meeting Papers 1352, Society for Economic Dynamics.
  11. Doepke, Matthias & Schneider, Martin, 2006. "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," CEPR Discussion Papers 5939, C.E.P.R. Discussion Papers.
  12. Huffman, Gregory W, 1987. "A Dynamic Equilibrium Model of Asset Prices and Transaction Volume," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 138-59, February.
  13. Matthias Doepke & Martin Schneider, 2006. "Inflation and the Redistribution of Nominal Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(6), pages 1069-1097, December.
  14. Labadie, Pamela, 1986. "Comparative Dynamics and Risk Premia in an Overlapping Generations Model," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 139-52, January.
  15. Krueger, Dirk & Kubler, Felix, 2004. "Computing equilibrium in OLG models with stochastic production," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1411-1436, April.
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