The life-cycle growth model is one model that CBO uses to estimate the long-term effects of changes in fiscal policy. For example, the model can analyze the effects of changes to the Social Security system.
CBO uses several models to analyze the effects of fiscal policy. In CBO’s view, changes in fiscal policy affect the economy in both the short and long term:
- Short-term effects are driven by changes in the demand for goods and services (such as consumption and investment) and changes in supply-side factors (such as growth in productivity and the supply of labor), as well as by the interactions between them.
- Long-term effects are primarily driven by changes in supply-side factors such as national saving, productivity, and people’s incentives to work, save, and invest.
The life-cycle growth model (also called an overlapping-generations, or OLG, model) is one model that CBO uses to estimate the long-term effects of changes in fiscal policy. CBO uses the model to analyze the effects of fiscal policy on the following:
- People’s incentives to work and save;
- The distribution of income, wealth, consumption, and taxes across households; and
- The well-being of different generations of households.