Intergenerational Redistribution in the Great Recession
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.
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of Minneapolis
Part of Series: Staff Report
Publication Date: 2014-05-20
Pages: 73 pages