Ruhr Economic Papers

Ruhr Economic Papers #15

Computation of Equilibria in OLG Models with Many Heterogeneous Households

by Sebastian Rausch and Thomas F. Rutherford

RGS Econ and Universität Duisburg-Essen, 06/2007, 37 S./p., 8 Euro, ISBN 978-3-86788-009-1

Abstract

This paper develops a decomposition algorithm by which a market economy with many households may be solved through the computation of equilibria for a sequence of representative agent economies. The paper examines local and global convergence properties of the sequential recalibration (SR) algorithm. SR is then demonstrated to efficiently solve Auerbach-Kotlikoff OLG models with a large number of heterogeneous households. We approximate equilibria in OLG models by solving a sequence of related Ramsey optimal growth problems. This approach can provide improvements in both efficiency and robustness as compared with simultaneous solution-methods.

JEL-Classification: C68, C81, D61, D91

Keywords: Computable general equilibrium; overlapping generations; micro- simulation; sequential recalibration