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

Figure 4

Productivity Shock in the Representative Agent Economy

Inflation

Reol b.o.p. Money Balances

Even though the impulse responses for working hours differ between the two models,
the reaction of output is the same. One has to keep in mind that effective labor and
raw hours react differently to a productivity shock in the OLG model since the more
productive workers increase their labor supply relative to the less productive workers.
Since empirical research on the impulse response of working hours after a technology
shock has focused on raw hours, our OLG model provides a possible resolution of this
puzzle.

4.3 Monetary shock

An expansionary monetary shock increases demand. As prices are sticky and firms are
monopolistic competitors in the intermediate goods sector, output and employment
increases. The impulse response functions of aggregate variables to a monetary growth
shock ε_θ,2 = 1 in period 2 (and zero thereafter) are presented in Figure 5. Again, the

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