On the Use of Projection Methods in the Computation of OLG Models / Zur Berechnung von OLG-Modellen mit Hilfe von Projektionsmethoden

Summary We compare projection methods with the standard value function grid algorithm in order to solve overlapping generations models. We apply the methods to a particular 60-period OLG model with elastic labor supply in order to study the effects of unfunded public pensions on aggregate savings and employment. For given accuracy, projection methods are found to dominate standard value function grid methods in terms of speed and required storage capacity. Furthermore, we apply projection methods to problems characterized by a multi-dimensional state space. Our results suggest that such more complex problems are also solvable with the help of ordinary personal computers using projection methods, while the use of value function grid methods may require excessive computer time and storage capacity with regard to current PC technology.