Chapter 27. Generational Policy and Aging in Closed and Open Dynamic General Equilibrium Models

This chapter examines the micro- and macroeconomic effects of generational policies using closed and open general equilibrium dynamic life-cycle models. The models illustrate the broad array of demographic, economic, and policy issues that can be simultaneously incorporated within todays computable models of economic growth. The list includes country-specific tax, spending, social security, healthcare policy, deficit policy age-cohort- and country-specific mortality, age-specific fertility, age-specific morbidity, lifespan uncertainty, age- and skill-specific emigration and immigration, earnings inequality driven by skill differences and idiosyncratic labor earnings uncertainty, capital adjustment costs, international trade, international capital flows, trade specialization, and trade policy. The chapter begins with the benchmark dynamic overlapping generations (OLG) simulation model of Auerbach and Kotlikoff (1987), discusses various advances in OLG simulation modeling and then presents two applications. The first is a closed-economy model, calibrated for Germany, that features idiosyncratic labor earnings uncertainty and changes in demographics. After running the model through a number of policy simulations, we turn to an open-economy model, featuring five regions (the US, Europe, Japan and other Asian countries, China, and India) producing six goods, some of which are traded. We use this model to quantify how economies will transition over time, how wage inequality will evolve, how tax rates will change in light of societal aging and how various unilateral and multilateral policy reforms impact the six regions.