The Fundamentals of Economic Dynamics and Policy Analyses : Learning through Numerical Examples. Part Ⅳ. Overlapping Generations Model <Article>
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An overlapping generations model is an applied dynamic general equilibrium model for which the lifecycle models are employed as main analytical tools. At any point in time, there are overlapping generations consisting of individuals born this year, individuals born last year, individuals born two years ago, and so on. As we saw in the analysis of lifecycle models, each individual makes an optimal consumption-saving plan to maximize lifetime utility over her/his lifecycle. For example, an individual with higher income in earlier stages and lower income in later stages of lifecycle will save in earlier stages to prepare for the consumption in later stages where the income is lower. In an economy consisting of overlapping generations, the aggregate variables are the sum of variables chosen by individuals at different stages of lifecycles. In this framework, demographic structure is an important element to determine macroeconomic performance. For this reason, overlapping generations models are used for analyzing economies in which there are intergenerational transactions such as social security systems, inheritances, bequests, and so on.
This paper consists of four sections. Section 1 presents dynamic general equilibrium analysis of an overlapping generations model in which each individual lives two periods lifecycle. The model is the simplest form of overlapping generations models. Section 2 presents an application of overlapping generations model to tax policy analysis. Section 3 presents an application of overlapping generations model to the analysis of the effects of changes in demographic structure on economic growth and welfare in an economy with pay-as-you-go public pension system. Section 4 briefly presents the Computable Dynamic General Equilibrium models which is often used for more realistic public policy analyses
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