Towards a quantitative theory of automatic stabilizers: The role of demographics

Employment volatility is larger for young and old workers than for the prime aged. At the same time, in countries with high tax rates, the share of total hours supplied by young/old workers is lower. These two observations imply a negative correlation between government size and business cycle volatility. This paper assesses in a heterogeneous agent OLG model the quantitative importance of these two facts to account for the empirical relation between government size and macroeconomic stability.Fondecyt 1120593 1151053 CONICYT PIA (Anillo project SOC 1402 on Search models: implications for markets, social interactions and public policy) Milennium Institute for Research in Market Imperfections and Public Policy ICM IS13000