The overlapping generations model is a workhorse of dynamic fiscal analysis.
OG-USA is dynamic in that households in the model make consumption, savings, and labor supply decisions based on their expectations over their entire lifetime, not just the current period. Because
OG-USA is a general equilibrium model, behavioral changes by households and firms can cause macroeconomic variables and prices to adjust. This characteristic has recently become a required component of fiscal policy analysis in the United States.1
But the main characteristic that differentiates the overlapping generations model from other dynamic general equilibrium models is its realistic modeling of the finite lifetimes of individuals and the cross-sectional age heterogeneity that exists in the economy. One can make a strong case that age heterogeneity and income heterogeneity are two of the main sources of diversity that explain much of the behavior in which we are interested for policy analysis.
OG-USA can be summarized as having the following characteristics.
overlapping generations of finitely lived households
households are forward looking and see to maximize their expected lifetime utility, which is a function of consumption, labor supply, and bequests
households choose consumption, savings, and labor supply every period.
The only uncertainty households face is with respect to their mortality risk
realistic demographics: mortality rates, fertility rates, immigration rates, population growth, and population distribution dynamics
heterogeneous lifetime income groups within each age cohort, calibrated from U.S. tax data
each lifetime income group has its own discount factor \(\beta_j\) following [CSTW17]
incorporation of detailed household tax data from
calibrated intentional and unintentional bequests by households to surviving generations
representative perfectly competitive firm maximizes static profits with general CES production function by choosing capital and labor demand
exogenous productivity growth is labor augmenting technological change
firms face a corporate income tax as well as various depreciation deductions and tax treatments
government collects tax revenue from households and firms
government distributes transfers to households
government spends resources on public goods
government can run deficits and surpluses
a stabilization rule (budget closure rule) must be implemented at some point in the time path if government debt is growing at a rate permanently different from GDP.
Aggregate, market clearing, and international
Aggregate model is deterministic (no aggregate shocks)
Three markets must clear: capital, labor, and goods markets
We will update this document as more detail is added to the model. We are currently working on adding stochastic income, aggregate shocks, multiple industries, and a large open economy multi-country version of the model. There is much to do and, as any self-respecting open source project should, we welcome outside contributions.