Intergenerational Redistribution in the Great Recession

78 Pages Posted: 30 Mar 2015

See all articles by Andrew S. Glover

Andrew S. Glover

University of Texas at Austin

Jonathan Heathcote

Minneapolis Fed

Dirk Krueger

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Jose-Victor Rios-Rull

University of Minnesota - Twin Cities

Multiple version iconThere are 3 versions of this paper

Date Written: January 2014

Abstract

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 they benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline close to three times as much as wages, consistent with the experience of the U.S. economy in the Great Recession. A model recession is almost 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.

Keywords: Recessions, overlapping generations, asset prices, aggregate risk

JEL Classification: E21, D31, D58, D91

Suggested Citation

Glover, Andrew S. and Heathcote, Jonathan and Krueger, Dirk and Rios-Rull, Jose-Victor, Intergenerational Redistribution in the Great Recession (January 2014). FRB Atlanta CQER Working Paper No. 2014-1. Available at SSRN: https://ssrn.com/abstract=2586109 or http://dx.doi.org/10.2139/ssrn.2586109

Andrew S. Glover

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Jonathan Heathcote

Minneapolis Fed ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

HOME PAGE: http://www.jonathanheathcote.com

Dirk Krueger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6691 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~dkrueger/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jose-Victor Rios-Rull

University of Minnesota - Twin Cities ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

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