“An Alternative Approximate Analytical Solution Procedure to Optimizing Growth Models” by Paul Sau-Him Lau
Author:
Paul Sau-Him Lau
Hong Kong Baptist University
Campbell (1994) argues that an analytical approach would be better than a computational approach in conveying to the readers about the usefulness of stochastic growth models, and suggests loglinearizing the Euler equation and the capital accumulation equation. Inspired partly by his approach and partly by the results of Long and Plosser (1983), this paper suggests an alternative approximate analytical solution to optimizing growth models with log utility function by only taking loglinear approximation of the capital accumulation equation. This approximate solution has a simple analytical form because the endogenously determined saving rates are time-invariant. It is further argued that the suggested solution procedure is most useful for endogenoud growth models.
