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

Pub. Date
03 March, 2016
Pub. Type

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.