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Visualizing the Overlapping Generations (OLG) Model

Exploring Capital Accumulation, Interest Rates, and Intergenerational Welfare

Posted on March 13, 2025

Introduction

The Overlapping Generations (OLG) model is a cornerstone of modern economic theory, used to study how resources are allocated across generations over time. Unlike simpler models, the OLG framework captures the lifecycle of individuals—working and saving when young, then consuming savings when old—while highlighting key dynamics like capital accumulation, interest rates, and intergenerational welfare. In this post, we’ll dive into these concepts and bring them to life with interactive visualizations.

What is the OLG Model?

Proposed by Paul Samuelson and later expanded by Peter Diamond, the OLG model assumes that individuals live for two periods: youth and old age. Each generation overlaps with the next, creating a continuous cycle of saving and consumption. The model is particularly useful for understanding:

• Capital Accumulation: How savings from the young translate into capital for the economy.
• Interest Rates: The return on savings that balances supply and demand for capital.
• Intergenerational Welfare: How policies affect the well-being of current and future generations.

Visualization: Capital Accumulation Over Time

Let’s start by visualizing how capital accumulates in an OLG economy. The chart below shows capital stock growing as young workers save a portion of their income each period.

Note: Adjust the parameters (e.g., savings rate) to see how capital evolves.

Visualization: Interest Rates Dynamics

Interest rates in the OLG model depend on the supply of savings and demand for capital. This graph illustrates how equilibrium interest rates shift with changes in population growth or productivity.

Visualization: Intergenerational Welfare

How do policies like taxation or debt impact different generations? This visualization compares utility levels across generations under various scenarios.

Conclusion

The OLG model offers a powerful lens for understanding long-term economic dynamics. By visualizing its core components—capital accumulation, interest rates, and welfare—we can better grasp how individual choices and policies ripple across generations. Try tweaking the parameters in the charts above to explore different outcomes!

This work is licensed under a Creative Commons Attribution 4.0 International License.