OLG Models with Uncertainty

Abstract

This chapter introduces both idiosyncratic and aggregate uncertainty into overlapping generations (OLG) models. The methods used for the computation of these models are already familiar from previous chapters on the (stochastic) neoclassical growth model and only need to be modified to allow for the more complex age structure of OLG models. Heer and Maußner first introduce individual stochastic productivity into the standard OLG model and apply the model to explain the empirically observed income and wealth distribution. In the second part, aggregate uncertainty is introduced into the OLG model and its business-cycle properties are compared to those of the standard real-business cycle model.