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

ordering is as in Figure 2 except for the upper left graph where the response of the
money growth rate is displayed rather than the response of the technology shock.

Figure 5

Monetary Shock in the OLG Model

S

!
!

!

I

I

Reoi b.o.ρ. Money Boionces

3
3

3

3
?
?

Inflation

Real interest Rate

The percentage changes of output, hours and investment are small and only amount
to 0.04%, 0.07% and 0.24%, respectively. Inflation, the real interest rate, and wages all
increase. Notice that, in this sticky price model, we are unable to model the liquidity
effect that nominal interest rates decrease following an expansionary monetary policy.
In addition, profits decline. This is one of the major shortcoming of the sticky-price
model that has been documented in the literature.¹⁶

The impulses responses of the Gini coefficients of capital, money, wealth, and income
are displayed in Figure 5. As in the case of an expansionary technology shock, the
distribution of market income becomes more unequal. The labor supply of the more
productive households is more elastic with respect to the real wage. Therefore, the
wage income of those households increases by more than the wage income of the less
productive households. In addition, the latter gain less from the increased rental rate
¹⁶See, among others, Christiano, Eichenbaum, and Evans (1997).

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