Generational Risk--Is it a Big Deal?: Simulating an 80-Period OLG Model With Aggregate Shocks

We calibrate and simulate 80, 40, and 20-period OLG models with aggregate shocks to assess generational risk. We overcome the curse of dimensionality by building on the Judd, Maliar, and Maliar algorithm, which limits a model's solution to its ergodic states, with no reliance on sparse grids, state-variable aggregation, or local approximations. We find that intrinsic generational risk is quite small, that government policies can produce generational risk, and that bond markets can share generational risk, including risks generated by policy. Our results hold with rare disasters, high risk aversion, persistent shocks, and stochastic depreciation.