A tractable overlapping generations structure for quantitative DSGE models

Abstract

This paper develops a novel tractable overlapping generations (OLG) structure whose aggregate equations resemble a model of an infinitely lived representative agent, except that there are no aggregate transversality conditions in the OLG economy. The main assumptions are complete markets and time-invariant (but age-dependent) consumption shares of age-groups. The tractability of the OLG structure here distinguishes it from conventional OLG models – the present structure is suitable for quantitative dynamic stochastic general equilibrium (DSGE) macro models. Importantly, the OLG structure here maintains key predictions of standard OLG models, namely the possibility of low real interest rates and of equilibrium indeterminacy. • This paper develops a novel tractable overlapping generations (OLG) structure. • Aggregate equations resemble a model of an infinitely lived representative agent. • However, there are no aggregate transversality conditions in the OLG economy. • The OLG structure here is much more tractable than conventional OLG models. • Thus, the present OLG structure is suitable for quantitative DSGE macro models.