Tuesday, January 28, 2014

The Atlanta Federal Reserve Does Some Austrian Type Research

In a paper put out by Atlanta Federal Reserve economists, Andrew Glover, Jonathan Heathcote, Dirk Krueger, and José-Víctor Ríos-Rull they conduct research in a, not complete, but somewhat Austrian fashion, by looking at how the bust part of the business cycle impacts different age groups. They write:
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 they benefit the young, who purchase assets at depressed prices. In our preferred calibration, asset prices decline close to three times as much as wages, consistent with the experience of the U.S. economy in the Great Recession. A model recession is almost welfare-neutral for households in the 20–29 age group, but translates into a large welfare loss of around 10 percent of lifetime consumption for households aged 70 and over.
They don't seem to completely get it that "asset prices" are the capital goods sector, which according to Austrian is where you would see the greatest boom and the greatest bust, but their research results is what you would expect based on Austrian theory. That said, don't get me started on  general equilibrium models.

The full paper is here.

1 comment:

  1. So, in short, deflation benefits the have nots and hurts the haves. Thus the hatred of the elite for deflation.