Some Results on the Solution of the Neoclassical Growth Model

FRB of Atlanta Working Paper No. 2003-34

26 Pages Posted: 25 Jan 2004

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: December 2003

Abstract

This paper presents some new results on the solution of the stochastic neoclassical growth model with leisure. We use the method of Judd (2003) to explore how to change variables in the computed policy functions that characterize the behavior of the economy. We find a simple closed-form relation between the parameters of the linear and the loglinear solution of the model. We extend this approach to a general class of changes of variables and show how to find the optimal transformation. We thus reduce the average absolute Euler equation errors of the solution of the model by a factor of three. We also demonstrate how changes of variables correct for variations in the volatility of the economy even if we work with first-order policy functions and how we can keep a linear representation of the model's laws of motion if we use a nearly optimal transformation. We conclude by discussing how to apply our results to estimate dynamic equilibrium economies.

Keywords: Dynamic equilibrium economies, computational methods, changes of variables, linear and nonlinear solution methods

JEL Classification: C63, C68, E37

Suggested Citation

Fernández-Villaverde, Jesús and Rubio-Ramirez, Juan Francisco, Some Results on the Solution of the Neoclassical Growth Model (December 2003). FRB of Atlanta Working Paper No. 2003-34. Available at SSRN: https://ssrn.com/abstract=488843 or http://dx.doi.org/10.2139/ssrn.488843

Jesús Fernández-Villaverde (Contact Author)

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Juan Francisco Rubio-Ramirez

Federal Reserve Bank of Atlanta - Research Department ( email )

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United States
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HOME PAGE: http://www.econ.umn.edu/~rubio

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