Intergenerational Redistribution in the Great Recession

Abstract

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 benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline more than twice as much as wages, consistent with the experience of the US economy in the Great Recession. A model recession is approximately welfare-neutral for households in the 20-29 age group, but translates into a large welfare loss of around 10% of lifetime consumption for households aged 70 and over.

On the welfare cost of rare housing disasters

“…Instead of using the historical data on drops in GDP, Pindyck and Wang (2013) infer the statistical properties of the income disaster risk from economic and …nancial variables, and …nd that society is willing to pay a consumption tax of over 50 percent to eliminate this jump risk. Glover et al (2014) examine the distributional consequences of the Great Recession, and …nd that a big negative technological shock hurts the old more than the young as a result of larger declines in equity prices relative to wages. This paper is also related to the literature studying the implications of housing for the Iacoviello and Pavan (2013), both of which study the impact of aggregate uncertainty on housing markets.…”

“…As shown in Table 1, I identify 18 housing disasters in the 616 observation years for the twenty countries in the sample, where …fteen of the twenty countries have experienced at least one housing disaster, with Japan, Switzerland and the United Kingdom having undergone two. 13 This implies an unconditional probability of housing market disasters equal to 3 percent each year, corresponding to roughly one disaster per country every 34 years. A housing disaster is found to last about 6.4 years on average, and the magnitude of house price declines ranges between 24 and 68 percent, with an average of about 34 percent.…”

Amortization Requirements and Household Indebtedness: An Application to Swedish- Style Mortgages

“…Housing investment is similar to Glover et al (2011), but incorporates a capacity utilization term, which depends on aggregate housing investment:…”

On the Distribution of the Welfare Losses of Large Recessions

“…In Krueger, Mitman, and Perri (2016) we estimate this process for household labor earnings after taxes (after first removing age, education and time effects) from annual PSID data and find estimates of (φ,σ 2 η ,σ 2 ) = (0.9695, 0.0384, 0.0522). Next we translate these estimates into a quarterly persistence and variance 18 and discretize the process into a finite state Markov chain. 19 …”

“…Unemployment Insurance Our model has two policy parameters: the replacement rate ρ of the unemployment insurance system, and the payroll tax rate τ SS of the social 18 We map the estimated annual persistence into quarterly persistence by setting φ =φ 1 4 . Our main objective when choosing quarterly variances is that the resulting process delivers a plausible crosssectional distribution of labor income.…”