Working Paper: CEPR ID: DP3154
Authors: Roger E. A. Farmer
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
JEL Codes: D50; D90; E30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| HA and HATAX models (C59) | low safe rate of interest (E43) |
| HATAX model (C59) | lower investment-to-GDP ratio (E22) |
| model specifications (C52) | interest rate (E43) |
| economic structure (L16) | investment behavior (G11) |
| underlying mechanisms (D01) | consumption, investment, employment, and GDP (E20) |