An Overlapping Generations Computable General Equilibrium (OLG-CGE) Model with Age-variable Rate of Time Preference

| Publication date: 3 Mar 2016 | Theme: Macroeconomics | NIESR Author(s): Lisenkova, K | External Author(s): Georges, P; Merette, M; Zhang, Q | JEL Classification: E17, F17, J11

It is generally accepted that people prefer to receive reward earlier rather than later. A positive rate of time preference is routinely used in economic models of intertemporal choice, for example OLG-CGE models. Calibrating an OLG-CGE model is challenging because age-profile data is usually not available. For example, researchers typically have no data on consumption by age group. The conventional way to proceed is to impose a constant rate of time preference, which implies smooth age profile for consumption.

The alternative methodology that we propose in this paper is to impose directly the bell-shaped consumption age profile from the National Transfer Accounts (NTA) and to introduce an age-variable rate of time preference. Compared with the conventional approach this variation leads to the lower level of savings and capital along the transition to a steady state. Our first results show that using the constant rate of time preference and smooth age consumption profile underestimates the negative effect of population ageing on the economy.

Keyword tags: 
OLG-CGE modelling
population ageing
rate of time preference
delay discounting
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