NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Jasmina Hasanhodzic

Babson College
Finance Division
231 Forest Street
Babson Park MA 02457

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NBER Working Papers and Publications

June 2013Generational Risk - Is It a Big Deal?: Simulating an 80-Period OLG Model with Aggregate Shocks
with Laurence J. Kotlikoff: w19179
The theoretical literature on generational risk assumes that this risk is large and that the government can effectively share it. To assess these assumptions, this paper calibrates and simulates 80-period, 40-period, and 20-period overlapping generations (OLG) life-cycle models with aggregate productivity shocks. Previous solution methods could not handle large-scale OLG models such as ours due to the well-known curse of dimensionality. The prior state of the art uses sparse-grid methods to handle 10 to 30 periods depending on the model's realism. Other methods used to solve large-scale, multi- period life-cycle models rely on either local approximations or summary statistics of state variables. We employ and extend a recent algorithm by Judd, Maliar, and Maliar (2009, 2011), which restr...
 
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