NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

John Y. Campbell

NBER Working Paper No. 4188
Issued in October 1992
NBER Program(s):   EFG

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 technology and government consumption. It emphasizes that the persistence of shocks is an important determinant of their macroeconomic effects.

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Document Object Identifier (DOI): 10.3386/w4188

Published: Journal of Monetary Economics, vol. 33 (June 1994), pp. 463-506.

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