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Inspecting the mechanism: An analytical approach to the stochastic growth model

  • Campbell, John Y.

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.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 33 (1994)
Issue (Month): 3 (June)
Pages: 463-506

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Handle: RePEc:eee:moneco:v:33:y:1994:i:3:p:463-506
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Robert E. Hall, 1979. "Labor Supply and Aggregate Fluctuations," NBER Working Papers 0385, National Bureau of Economic Research, Inc.
  2. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The output, employment, and interest rate effects of government consumption," Working Papers 456, Federal Reserve Bank of Minneapolis.
  3. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
  4. John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
  5. Plosser, Charles I, 1989. "Understanding Real Business Cycles," Journal of Economic Perspectives, American Economic Association, vol. 3(3), pages 51-77, Summer.
  6. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, monetary policy, and the business cycle," Discussion Paper / Institute for Empirical Macroeconomics 70, Federal Reserve Bank of Minneapolis.
  7. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
  8. Lars Peter Hansen & Thomas J. Sargent, 1993. "Recursive linear models of dynamic economies," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  9. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  10. repec:fth:harver:1435 is not listed on IDEAS
  11. Greenwood, J. & Huffman, G., 1991. "Tax Analysis in A Real Business Cycle Model: On Measuring Harberger Triangles and Okun Gaps," UWO Department of Economics Working Papers 9103, University of Western Ontario, Department of Economics.
  12. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
  13. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  14. Lawrence J. Christiano & Martin Eichenbaum & David Marshall, 1990. "The permanent income hypothesis revisited," Staff Report 129, Federal Reserve Bank of Minneapolis.
  15. Baxter, M. & Crucini, M.J., 1990. "Explaining Saving/Investment Correlation," RCER Working Papers 224, University of Rochester - Center for Economic Research (RCER).
  16. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics 24, Federal Reserve Bank of Minneapolis.
  17. Taylor, John B & Uhlig, Harald, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 1-17, January.
  18. Ellen R. McGrattan, 1991. "The macroeconomic effects of distortionary taxation," Discussion Paper / Institute for Empirical Macroeconomics 37, Federal Reserve Bank of Minneapolis.
  19. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June.
  20. Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
  21. Lawrence H. Summers, 1986. "Some skeptical observations on real business cycle theory," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 23-27.
  22. Richard Rogerson, 2010. "Indivisible Labor, Lotteries and Equilibrium," Levine's Working Paper Archive 250, David K. Levine.
  23. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : II. New directions," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 309-341.
  24. Martin S. Eichenbaum & Lars Peter Hansen & Kenneth J. Singleton, 1986. "A Time Series Analysis of Representative Agent Models of Consumption andLeisure Choice Under Uncertainty," NBER Working Papers 1981, National Bureau of Economic Research, Inc.
  25. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  26. King, R.G. & Baxter, M., 1990. "Productive Externalities And Cyclical Volatility," RCER Working Papers 245, University of Rochester - Center for Economic Research (RCER).
  27. Simon, Julian L, 1990. "Great and Almost-Great Magnitudes in Economics," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 149-56, Winter.
  28. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  29. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
  30. Robert J. Barro, 1980. "Output Effects of Government Purchases," NBER Working Papers 0432, National Bureau of Economic Research, Inc.
  31. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  32. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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