Business Cycles with Heterogenous Agents

31 Pages Posted: 5 Feb 2002

See all articles by Roger E. A. Farmer

Roger E. A. Farmer

University of Warwick; University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); National Institute of Economic and Social Research (NIESR)

Date Written: January 2002

Abstract

I show how to construct a stochastic long-lived overlapping generation's model that is based on a non-stochastic model developed by Olivier Blanchard and Philippe Weil and that nests the RBC model as a special case. My innovation over previous work is to add an aggregate stochastic shock. I provide three different calibrations of my model economy. One mimics the RBC model and the other two are heterogenous agent economies (HA and HATAX) with and without corporate income taxes. I show that the HA and HATAX models can explain the low safe rate of interest that has been observed for long periods in US data. The HATAX model can also explain the fact that the investment to GDP ratio in US data is lower than the profit share. All three models are almost identical in their predictions for the comovements and volatility's of consumption, investment, employment and GDP at business cycle frequencies.

Keywords: Business cycles, dynamic general equilibrium theory, overlapping generations

JEL Classification: D50, D90, E30

Suggested Citation

Farmer, Roger E.A., Business Cycles with Heterogenous Agents (January 2002). Available at SSRN: https://ssrn.com/abstract=299432

Roger E.A. Farmer (Contact Author)

University of Warwick ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://Rogerfarmer.com

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Bunche Hall 8283
P.O. Box 951477
Los Angeles, CA 90095-1477
United States
310-825-6547 (Phone)
310-825-9528 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Institute of Economic and Social Research (NIESR) ( email )

2 Dean Trench Street
Smith Square
London, SW1P 3HE
United Kingdom

HOME PAGE: http://NIESR.ac.uk

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