Working Paper: CEPR ID: DP17594
Authors: Roger Farmer; Leland Farmer
Abstract: We construct a perpetual youth DSGE model with aggregate uncertainty in which there are dynamically complete markets and agents have Epstein-Zin preferences. We prove that, when endowments have a realistic hump-shaped age-profile, our model has three steady-state equilibria. One of these equilibria is dynamically inefficient and displays real price indeterminacy. We estimate the parameters of our model and we find that a fourth-order approximation around the indeterminate steady-state provides the best fit to U.S. data. Our work interprets the large and persistent generational inequality that has been observed in western economies over the past century as the result of uninsurable income shocks to birth cohorts.
Keywords: Asset Pricing; Indeterminacy
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uninsurable income shocks to birth cohorts (J19) | large and persistent generational inequality (J79) |
| low safe-rate equilibrium (C62) | excess asset price volatility (G19) |
| interaction of humpshaped endowment profile and low intertemporal elasticity of substitution (D15) | multiple steady-state equilibria (D50) |
| multiple steady-state equilibria (D50) | some equilibria are dynamically inefficient (D50) |
| indeterminate steady-state (C62) | best fit to U.S. data (C29) |