"We're all in this together"? A DSGE interpretation

Richard McManus

Discussion Papers from Department of Economics, University of York

Abstract: The recent global economic downturn has resulted in hardship for many individuals and the unequal distribution of this hardship across agents is frequently debated. This paper constructs a small scale New Keynesian DSGE model to test whether individuals suffer to similar degrees during recessions: in effect testing the common political mantra `we're all in this together'. It does this by including heterogeneity in the actions of households through their access to capital markets distinguishing those with full access (Ricardian agents) from those with no access (rule-of-thumb agents). In aggregate welfare movements as a result of recessionary shocks are small but this hides a big divergence with the credit constrained signi cantly losing. There is a redistribution of welfare from non-Ricardian to Ricardian households from the shock, and under reasonable calibrations, the latter are seen to gain at the expense of the former.

Keywords: Cost of business cycles; rule-of-thumb consumers; welfare; heterogeneity (search for similar items in EconPapers)
JEL-codes: D63 E32 I30 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:13/08

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