Business Cycles With Heterogenous Agents

Roger Farmer

No 3154, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: I show how to construct a stochastic long-lived overlapping generation?s model that is based on a non-stochastic model developed by Olivier Blanchard and Philippe Weil and that nests the RBC model as a special case. My innovation over previous work is to add an aggregate stochastic shock. I provide three different calibrations of my model economy. One mimics the RBC model and the other two are heterogenous agent economies (HA and HATAX) with and without corporate income taxes. I show that the HA and HATAX models can explain the low safe rate of interest that has been observed for long periods in US data. The HATAX model can also explain the fact that the investment to GDP ratio in US data is lower than the profit share. All three models are almost identical in their predictions for the comovements and volatility?s of consumption, investment, employment and GDP at business cycle frequencies.

Keywords: Business cycles; Dynamic general equilibrium theory; Overlapping generations (search for similar items in EconPapers)
JEL-codes: D50 D90 E30 (search for similar items in EconPapers)
Date: 2002-01
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (3)

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