Dynamic OLG Model

PWBM’s dynamic OLG model is detailed here. PWBM-TM’s tax functions are an important input into PWBM’s dynamic general equilibrium OLG model since the tax functions account for household and firm heterogeneity. This model is used to evaluate proposed policy changes over long time horizons by calculating the macroeconomic effects of those policy proposals on individual households and the macroeconomy. These macroeconomic effects feed back into the budget primarily through changes to interest rates and wages. This type of analysis is important in understanding the true budgetary effect of any policy change that affects the macroeconomy (including changes to outlays and revenues as well as changes that affect immigration or national infrastructure). By allowing for the macroeconomic feedback associated with any policy change, the dynamic OLG model better describes the timepath of the variables of interest than an independent static model. The model traces the timepath by allowing the behavioral responses of households to change economic aggregates prices and economic aggregates and therefore, the path of the economy. The dynamic OLG uses the tax functions, the revenues and the outlays from PWBM-TM to produce two sets of results: static and dynamic. The former is the set of results from the dynamic model that does not allow agents to optimize their behavior. The latter is the set of results from the dynamic model that does allow agents to optimize their behavior.