Marlon Azinovic, University of Pennsylvania (Job Market Seminar)

“Intergenerational Consequences of Rare Disasters”

Abstract

We analyze the intergenerational consequences of rare disasters in a calibrated overlapping generations model featuring realistic household portfolios and equilibrium asset prices. Households own houses and additionally trade in bonds and equity. In a disaster, young households suffer from reduced labor income and tightened borrowing constraints. Older households lose a large portion of their savings invested in risky assets. The relative winners are households shortly before retirement, who have a comparatively stable labor income, are not borrowing constrained, and are young enough to benefit from large returns of assets purchased during the disaster at depressed prices.

In order to solve the model, we advance contemporary deep learning based solution methods along two complementary dimensions. First, we introduce an economics-inspired neural network architecture that, by construction, ensures that market clearing conditions are always satisfied. Second, we illustrate how to solve models with multiple assets by introducing them step-wise into the economy. These two innovations enable us to reduce the number of equilibrium conditions, that are not fulfilled exactly, and to substantially improve the stability of the training algorithm.

Contact person: Jeppe Druedahl