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AGING, THE GREAT MODERATION, AND BUSINESS-CYCLE VOLATILITY IN A LIFE-CYCLE MODEL

Published online by Cambridge University Press:  07 July 2016

Burkhard Heer ,
Stefan Rohrbacher  and
Christian Scharrer
Burkhard Heer*
Affiliation:
University of Augsburg and CESifo
Stefan Rohrbacher
Affiliation:
University of Augsburg
Christian Scharrer
Affiliation:
University of Augsburg
*
Address correspondence to: Burkhard Heer, Department of Economics, University of Augsburg, Universitatsstrasse 16, 86159 Augsburg, Germany; e-mail: [email protected].
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Abstract

According to empirical studies, the life cycle of labor supply volatility exhibits a U-shaped pattern. This may lead to the conclusion that demographic change induces a drop in output volatility. We present an overlapping-generations model that replicates the empirically observed pattern and study the impact of demographic transition on output volatility. We find that the change in age composition itself has only a marginal influence on output volatility, as the mitigating effect of more individuals with lower labor supply volatilities is compensated for by higher age-specific labor shares. Instead, the driving force behind the Great Moderation in our model is the downward shift of the age-specific labor supply volatility curve.

Keywords

Business CyclesOverlapping GenerationsDemographics
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 2 , March 2017 , pp. 362 - 383
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

We would like to thank two anonymous reviewers for their helpful and constructive comments, which greatly contributed to improving the final version of the paper. Moreover, we would also like to thank Johann Scharler (University of Innsbruck) for his extensive discussions with us and for his helpful comments. Stefan Rohrbacher and Christian Scharrer thank the Research Center Global Business Management at the University of Augsburg for financial support. All remaining errors are ours.

References

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