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

Quarter

Gini wealth

Figure 3

Technology Shock in the OLG Model and Distribution

Gini capital                                     Gini money

Quarter

Gini market∕disposable income

from the reactions of the younger and poorer agents: the income effect associated with
the increase of profits and transfers dominates the substitution effect of higher real
wages and they demand more leisure.¹⁴ Since older agents are more productive and,
thus, earn higher wages, and since for them the discounted value of the increased profit
stream is smaller, their supply of working hours increases, which also explains why
effective labor input increases whereas working hours decrease at impact. Given the
recent discussion on the empirical relation between productivity shocks and working
hours (see Christiano et al., 2003 and the literature cited therein) we cannot say that
this reaction is at odds with the current empirical wisdom. Quite on the contrary, our
model provides a possible clue to the negative relation between productivity shocks

¹⁴ The reduction in profits in period t = 3 also explains the spike in period t = 3 in the impulse
responses of effective labor and working hours.

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