Computing equilibrium in OLG models with stochastic production

✍ Scribed by Dirk Krueger; Felix Kubler

• Book ID: 104293426
• Publisher: Elsevier Science
• Year: 2004
• Tongue: English
• Weight: 355 KB
• Volume: 28
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(03)00111-8

✦ Synopsis

In this paper we develop a projection algorithm to approximate equilibria in overlapping generations economies with a large number of generations and stochastic aggregate production. In these types of economies the state space includes the distribution of wealth across generations. We use Smolyak's algorithm to approximate policy functions, which map the current state into agents' optimal choices, by linear combinations of polynomials. This allows us to compute equilibria for models where agents live for 20 -30 periods.

We also provide examples which demonstrate that approximating the cross-sectional wealth distribution only by its ÿrst moment (and thereby reducing the dimension of the state space to two continuous state variable, independently of the number of agents) often leads to very high relative errors in agents' Euler equations.