Heterogeneous Agent Model With Real Business Cycle With Application In Optimal Tax Policy And Social Welfare Reform

In this paper, we develop a dynamic stochastic general equilibrium (DSGE) model with financial friction and incomplete risk-sharing among overlapping-generation (OLG) heterogeneous households. The economy is embedded with taxation system and social security system calibrated to current U.S. economy and tax policy, as well as elastic labor supply. Our baseline model can match wealth-income disparity and moment conditions in financial market as well as macroeconomic variables. In baseline setting, the mean risk-free rate is 1.36$%$ per year, the unlevered equity premium is 4.08$%$, and Gini coefficient for labor earning and total income is 0.65 and 0.51 respectively. The equity risk premium is driven by incomplete risk sharing among household and participation barrier to equity market. Furthermore, our model can act as workhorse model for policy experiment including debt policy, wealth tax reform, capital income tax reform and social security system reform. This paper could be beneficial to policy maker to understand the impact of policy change to macroeconomy and household-level behavior.