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Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model

John Campbell ()

Scholarly Articles from Harvard University Department of Economics

Abstract: This paper argues that a clear understanding of the stochastic growth model can best be achieved by working out an approximate analytical solution. The proposed solution method replaces the true budget constraints and Euler equations of economic agents with loglinear approximations. The model then becomes a system of loglinear expectational difference equations, which can be solved by the method of undetermined coefficients. The paper uses this technique to study shocks to techno- logy and shocks to government spending financed by lump-sum or distortionary taxation. It emphasizes that the persistence of shocks is an important determinant of their macroeconomic effects.

Date: 1994
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Published in Journal of Monetary Economics

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Related works:
Journal Article: Inspecting the mechanism: An analytical approach to the stochastic growth model (1994) Downloads
Working Paper: Inspecting the Mechanism: An Analytical Approach to the Stochastic Growth Model (1992) Downloads
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