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Intergenerational Redistribution in the Great Recession

Andrew Glover, Jonathan Heathcote, Dirk Krueger, and José-Víctor Ríos-Rull
CQER Working Paper 14-01
January 2014

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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.

JEL classification: E21, D31, D58, D91

Key words: Recessions, overlapping generations, asset prices, aggregate risk

The authors thank participants of the Wharton Macro Lunch, American Economic Association Meetings in Atlanta and Denver, the 2011 EFG Meetings in New York, the Progressive Economics Conference at the Richmond Fed, the NBER Summer Institute, the Nordic Summer Symposium in Macroeconomics, German Economics Christmas Meeting, 32° Encontro Brasileiro de Econometria, ASU, Autonoma de Barcelona, Banco de Portugal, European Central Bank, Sveriges Riksbank, Banca d.Italia, CEMFI, Chicago, Columbia, University of California-Davis, Hannover, London Business School, Miami, New York University, University College London, and London School of Economics, and our discussants David Andolfatto, Larry Jones, and Gianluca Violante for helpful comments, as well as the National Science Foundation for financial support. The views expressed here are those of the authors' and not necessarily those of the Federal Reserve Banks of Atlanta or Minneapolis or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Andrew Glover, University of Texas–Austin,; Jonathan Heathcote, Federal Reserve Bank of Minneapolis and CEPR,; Dirk Krueger, CEPR, University of Pennsylvania, and NBER,; or José-Víctor Ríos-Rull., University of Minnesota, Federal Reserve Bank of Minneapolis, CEPR, NBER, and CAERP,

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