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

Gini wealth

Figure 6

Monetary shock in the OLG model and distribution

Gini capital                                     Gini money

Gini market∕disposable income

of capital services. Again, the transfer and tax system more than compensates these
effects. Since the real value of pensions sharply declines in first period of the shock
transfers sore by more than 30 percent. In the next four periods transfers are still well
above 1 percent as compared to their non-stochastic long run level. The additional wage
and capital income of the richer agents is taxed at a higher rate. As a consequence of
both effects the distribution of disposable income becomes more equal.

The impulse response functions of the aggregate variables in the Ramsey model with
Calvo price staggering are graphed in Figure 7 (the dotted lines). Again the ordering
of the variables is identical to the one in Figure 5. Notice that the qualitative behavior
of the variables in response to a monetary expansion is the same in the two economies
for all variables with a minor exception. In the OLG model, there is a little more
consumption smoothing than in the representative-agent economy so that the capital

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