Business Cycle Dynamics of a New Keynesian Overlapping Generations Model with Progressive Income Taxation

CESifo Working Paper No. 1692

Business Cycle Dynamics of a New
Keynesian Overlapping Generations
Model with Progressive Income Taxation

Abstract

In our dynamic optimizing sticky price model, agents are heterogeneous with regard to their
age and their productivity. We find that the business cycle dynamics in the OLG model in
response to both a technology shock and a monetary shock are similar, but not completely
identical to those found in the corresponding representative-agent model. In particular,
working hours in the OLG model decrease in response to a positive technological shock, since
for young workers the income effect dominates the substitution effect. This is in line with the
adverse effect of productivity shocks on employment found in structural vector
autoregressions.

JEL Code: E31, E32, E52, D31, D58.

Keywords: fluctuations, unanticipated inflation, wealth distribution, income distribution,
progressive income taxation, Calvo price staggering.

We would like to thank Jonathan Heathcote, Victor Rιos-Rull, and Eric Young for their
comments. All remaining errors are ours. Burkhard Heer kindly acknowledges support from
the German Science Foundation (Deutsche Forschungsgemeinschaft DFG) during his stays at
Georgetown University, University of Pennsylvania, and Stanford University.

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