Are overlapping generation models (OLG) extensions of a dynamic stochastic general equilibrium (DSGE) model? Or aren't these DSGE per se?
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1$\begingroup$ Most people do not refer to OLG-models when they refer to DSGEs, irrespective of whether OLG models can be general equilibrium models with dynamics and stochastics. $\endgroup$– Michael GreineckerCommented May 18, 2020 at 20:23
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$\begingroup$ Ok thanks. But I'm not interested in semantics here, more in similarities in paradigm/methodology. $\endgroup$– Beck BatucadaCommented May 19, 2020 at 16:25
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1 Answer
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You can find OLG models that do not classify as DSGE (in particular, the model might not be stochastic) as well as DSGE with overlapping generations (contrary to those with infinitely lived agents).
You can find more detail on this on this working paper by Assous and Duarte (2017), as they note
In the early 1980s, when the real business cycle macroeconomists brought one single model (a perfectly competitive growth model with infinite-lived agents, flexible prices, and perfect information) to bear on any macroeconomic issue, several macroeconomists were working with OLG models and addressing business fluctuations matters. Besides the efficiency issue, the model seemed to have much more to offer. New classical economists such as Wallace and Lucas saw in the OLG model the possibility to develop new microfounded models of fiat money without postulating that money balances enter the utility function of agents. At about the same time, other macroeconomists discovered that OLG models give room for either deterministic or stochastic oscillatory trajectories. Endogenous cycles and chaos as well as sunspot equilibria were then shown to occur in the presence of perfectly competitive product market devoid of any nominal price rigidities. Gradually over time, important contributors to that literature — most notably, for our interests here, is Woodford — strove to transfer OLG conclusions to infinite-lived agents models. In this context, new dynamic models with market imperfections were developed, initially with flexible prices, that eventually became the hallmark of the sticky price, DSGE macroeconomics (earlier referred to as the new neoclassical synthesis).
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$\begingroup$ Thanks for your answer. So, if OLG is not DSGE, it's because they leave out exogenous shocks for simplicity? I guess this is a rather minor deviation. They still mostly retain rational expectations, general equilibrium and dynamic optimization over time, I guess? $\endgroup$ Commented May 18, 2020 at 18:43
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1$\begingroup$ You can study DSGE models within an OLG framework. But note that in OLG any dynamics are likely to be in capital stock adjustment and accumulation of wealth and public debt (and at the core these models mostly focus on long-run equilibrium); while DSGE models emphasise the dynamics of the economic cycle (with businesses and consumers basing their expectations on the forecasts of the model). DSGE models analyse the effects of macro policies and shocks on the economic cycle, while OLG models (as a type of CGE model) will study the impact of permanent policies. $\endgroup$– AliCommented May 19, 2020 at 10:59
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1$\begingroup$ But like I said, these differences do not preclude the possibility to treat DSGE models in an OLG framework (for example, a way to break the Ricardian equivalence underlying benchmark DSGE models is to move to an OLG framework). Generally speaking, DSGE and OLG models encompass a wide variety of models and whether a model classifies as DSGE or OLG (or both) will refer to whether it has the key characteristics of these models. However, like @Michael Greinecker pointed out, most people will not refer to OLG models when they refer to DSGE. $\endgroup$– AliCommented May 19, 2020 at 11:06