Computation of Equilibria in OLG Models with Many Heterogeneous Households

Over the past twenty years infinite horizon general equilibrium models with overlapping enerations (OLG) have become an important tool for policy analysis, and have been fruitfully applied in fields such as macroeconomics or public finance (see, e.g., Auerbach and Kotlikoff (1987), and Kotlikoff (2000) for an overview). OLG models naturally involve a large number of variables and equations that describe the equilibrium behavior of economic agents. As a consequence, the development of large-scale OLG models is often limited by the computational capacity of available numerical solution methods. In particular, models that exhibit a rich household side including a variety of household-specific effects, a large number of heterogeneous households, and realistic agent lifetimes typically require “customized solution methods” which may be both costly to implement and difficult to validate.