The Lost Generation of the Great Recession
49 Pages Posted: 8 Jan 2015 Last revised: 10 May 2018
Date Written: May 1, 2018
This paper analyzes the effects of the Great Recession on different generations. While older generations suffered the largest decline in wealth due to the collapse in asset prices, younger generations suffered the largest decline in labor income. Potentially, some households may have benefited from the purchase of cheaper assets. To analyze the impact of these channels, I construct an overlapping-generations model with borrowing constraints in which households choose a portfolio of risky and risk-free assets. In response to shocks to labor income and asset markets resembling the Great Recession, young risky asset holders suffer the largest welfare losses, equivalent to a 33 percent reduction in one-period consumption.
Keywords: Great Recession; heterogeneous agents; overlapping generations; portfolio choice; borrowing constraints
JEL Classification: D15, D31, E21, E32, G11
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