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

In our dynamic optimizing sticky price model, agents are heterogeneous with regard to their\nage and their productivity. We find that the business cycle dynamics in the OLG model in\nresponse to both a technology shock and a monetary shock are similar, but not completely\nidentical to those found in the corresponding representative-agent model. In particular,\nworking hours in the OLG model decrease in response to a positive technological shock, since\nfor young workers the income effect dominates the substitution effect. This is in line with the\nadverse effect of productivity shocks on employment found in structural vector\nautoregressions.