Stochastic growth with short-run prediction of shocks
We study a variation of the one-sector stochastic optimal growth model with independent and identically distributed shocks where agents acquire information that enables them to accurately predict the next period’s productivity shock (but not shocks in later periods). Optimal policy depends on the forthcoming shock. A “better” predicted realization of the shock that increases both marginal and total product always increases next period’s optimal output. We derive conditions on the degree of relative risk aversion and the elasticity of marginal product under which optimal investment increases or decreases with a better shock. Under fairly regular restrictions, optimal outputs converge in distribution to a unique invariant distribution whose support is bounded away from zero. We derive explicit solutions to the optimal policy for three well-known families of production and utility functions and use these to show that volatility of output, sensitivity of output to shocks, and expected total investment may be higher or lower than in the standard model where no new information is acquired over time; the limiting steady state may also differ significantly from that in the standard model. Copyright Springer-Verlag 2012
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 51 (2012)
Issue (Month): 3 (November)
|Contact details of provider:|| Web page: http://link.springer.de/link/service/journals/00199/index.htm|
|Order Information:||Web: http://link.springer.de/orders.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Freixas, Xavier, 1981. "Optimal growth with experimentation," Journal of Economic Theory, Elsevier, vol. 24(2), pages 296-309, April.
- Christos Koulovatianos & Leonard J. Mirman & Marc Santugini, 2007.
"Optimal Growth and Uncertainty: Learning,"
Cahiers de recherche
07-05, HEC Montréal, Institut d'économie appliquée, revised Feb 2008.
- Edlin, Aaron S. & Shannon, Chris, 1998.
"Strict Monotonicity in Comparative Statics,"
Journal of Economic Theory,
Elsevier, vol. 81(1), pages 201-219, July.
- Rabi Bhattacharya & Mukul Majumdar, 2003. "Random dynamical systems: a review," Economic Theory, Springer, vol. 23(1), pages 13-38, December.
- Stephanie Schmitt-Grohe & Martin Uribe, 2008.
"What's News in Business Cycles,"
NBER Working Papers
14215, National Bureau of Economic Research, Inc.
- Tapan Mitra & Santanu Roy, 2006.
"Optimal exploitation of renewable resources under uncertainty and the extinction of species,"
Springer, vol. 28(1), pages 1-23, 05.
- Mitra, Tapan & Roy, Santanu, 2003. "Optimal Exploitation of Renewable Resources under Uncertainty and the Extinction of Species," Working Papers 03-10, Cornell University, Center for Analytic Economics.
- Beaudry, Paul & Portier, Franck, 2004.
"An exploration into Pigou's theory of cycles,"
Journal of Monetary Economics,
Elsevier, vol. 51(6), pages 1183-1216, September.
- Kengo Nutahara, 2007. "Matlab code to replicate the Beaudry-Portier news shock model," QM&RBC Codes 170, Quantitative Macroeconomics & Real Business Cycles.
- Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
- Mirman, L.J. & Samuelson, L. & Urbano, A., 1989.
8-89-7, Pennsylvania State - Department of Economics.
- de Hek, Paul & Roy, Santanu, 2001. "On Sustained Growth under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 801-13, August.
- Christopher Costello & Stephen Polasky & Andrew Solow, 2001. "Renewable resource management with environmental prediction," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 196-211, February.
- Donaldson, John B. & Mehra, Rajnish, 1983. "Stochastic growth with correlated production shocks," Journal of Economic Theory, Elsevier, vol. 29(2), pages 282-312, April.
- Danthine, Jean-Pierre & Donaldson, John B. & Johnsen, Thore, 1998.
"Productivity growth, consumer confidence and the business cycle,"
European Economic Review,
Elsevier, vol. 42(6), pages 1113-1140, June.
- Danthine, Jean-Pierre & Donaldson, John B & Johnsen, Thore, 1998. "Productivity Growth, Consumer Confidence and the Business Cycle," CEPR Discussion Papers 1779, C.E.P.R. Discussion Papers.
- Jean-Pierre DANTHINE & John B. DONALDSON & Thore JOHNSEN, 1997. "Productivity Growth, Consumer Confidence and the Business Cycle," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9711, Université de Lausanne, Faculté des HEC, DEEP.
- Mitra, Tapan & Montrucchio, Luigi & Privileggi, Fabio, 2001.
"The Nature of the Steady State in Models of Optimal Growth Under Uncertainty,"
01-04, Cornell University, Center for Analytic Economics.
- Tapan Mitra & Luigi Montrucchio & Fabio Privileggi, 2003. "The nature of the steady state in models of optimal growth under uncertainty," Economic Theory, Springer, vol. 23(1), pages 39-71, December.
- Demers, Michel, 1991. "Investment under Uncertainty, Irreversibility and the Arrival of Information over Time," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 333-50, April.
- Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- de Hek, Paul A, 1999. "On Endogenous Growth under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 727-44, August.
When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:51:y:2012:i:3:p:539-580. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)or (Christopher F Baum)
If references are entirely missing, you can add them using this form.