Working Paper: NBER ID: w30419
Authors: Leland Farmer; Roger 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: Perpetual Youth; Asset Pricing; Indeterminacy
JEL Codes: E44; G12
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) | generational inequality (I24) |
| uninsurable income shocks to birth cohorts (J19) | asset price volatility (G19) |
| hump-shaped age profile of endowments (J26) | steady-state equilibria (D50) |
| steady-state equilibria (D50) | asset market behavior (G19) |
| lifetime median income varies by cohort (J17) | lifetime earnings prospects (J17) |
| lifetime earnings prospects (J17) | asset market behavior (G19) |