Loglinear Approximate Solutions to Real-Business-Cycle Models: Some Observations

Sau-Him Paul Lau and Philip Hoi-Tak Ng

The Journal of Economic Education, 2007, vol. 38, issue 2, 194-204

Abstract: Following the analytical approach suggested in Campbell, the authors consider a baseline real-business-cycle (RBC) model with endogenous labor supply. They observe that the coefficients in the loglinear approximation of the dynamic equations characterizing the equilibrium are related to the fundamental parameters in a relatively simple manner. These equations can be used to obtain the closed-form approximate solution with ease and to demonstrate the properties (uniqueness) of the solution with clarity. Furthermore, comparative static results can be confirmed analytically (by straightforward differentiation). Most of these conclusions can be generalized to more complicated RBC models.

Date: 2007
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DOI: 10.3200/JECE.38.2.194-207

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