Stochastic continuous time growth models that allow for closed form solutions
Francesco Menoncin () and
Stefano Nembrini ()
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Francesco Menoncin: University of Brescia
Stefano Nembrini: University of Brescia
Journal of Economics, 2018, vol. 124, issue 3, 213-241
Abstract We find a closed form solution that maximises the expected utility of an agent’s inter-temporal consumption subject to a stochastic technology, which is a linear combination of AK and Cobb–Douglas technologies. Additionally, we consider two cases of agent preferences: (i) Constant Relative Risk Aversion (CRRA) preferences, which treat optimal consumption as a linear function of capital, and (ii) Hyperbolic Absolute Risk Aversion (HARA) preferences, which treat optimal consumption as an affine function of capital. By establishing a minimum (subsistence) level of consumption in the HARA model, we are able to create a framework that more accurately represents real-world circumstances than previous studies have done. Furthermore, for both the CRRA and HARA cases we show the suitable, consistent stochastic differential equation which describes the capital dynamics. Finally, we perform a numerical simulation based on the CRRA case and calibrate US data for the HARA case.
Keywords: Dynamic stochastic general equilibrium models; Closed-form solution; HARA preferences; CRRA preferences; Autonomous consumption (search for similar items in EconPapers)
JEL-codes: E2 O4 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:124:y:2018:i:3:d:10.1007_s00712-017-0567-z
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