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Intergenerational Redistribution in the Great Recession

Author

Listed:
  • Jose-Victor Rios Rull

    (Minnesota)

  • Jonathan Heathcote

    (Minneapolis FED)

  • Dirk Krueger

    (Univ. of Pennsylvania)

  • Andy Glover

    (Minnesota)

Abstract

We construct stochastic overlapping-generations general equilibrium models 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 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 more than twice as much as wages, consistently 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 percent of lifetime consumption for households aged 70 and over.

Suggested Citation

  • Jose-Victor Rios Rull & Jonathan Heathcote & Dirk Krueger & Andy Glover, 2011. "Intergenerational Redistribution in the Great Recession," 2011 Meeting Papers 141, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:141
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

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

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