Aggregate Fluctuations in a Quantitative Overlapping Generations Economy with Unemployment Risk
Aubhik Khan ()
No 1468, 2016 Meeting Papers from Society for Economic Dynamics
We explore business cycles in a quantitative overlapping generations economy where households face both unemployment risk and, conditional on employment, income risk. In this environment, we examine the effect of aggregate shocks on the distribution of consumption, income and wealth across households and how this distribution shapes the aggregate response to these shocks. While TFP fell relatively little, in the recent US recession, there was a large fall in hours worked. Consistency with these observations, in the model, requires a substantial and persistent increase in unemployment risk that disproportionately affects younger working households. Conversely, explaining the reduction in aggregate consumption implies a financial shock to households' net return on assets. This drives a non-monotonic welfare cost of the recession, over generations, varying by the share of income derived from capital and labour. Overall, young workers, and older workers near retirement, suffer the most from the increase in unemployment and the fall in the return on wealth, respectively. Inequality in wealth also shapes the aggregate response of the economy. Aggregate investment falls by more when households face little income risk, holds less precautionary savings, and are more responsive to changes in real interest rates.
New Economics Papers: this item is included in nep-age, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1468
Access Statistics for this paper
More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().