IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v119y2004i2p271-298.html
   My bibliography  Save this article

Small noise asymptotics for a stochastic growth model

Author

Listed:
  • Williams, Noah

Abstract

We develop analytic asymptotic methods to characterize time series properties of nonlinear dynamic stochastic models. We focus on a stochastic growth model which is representative of the models underlying much of modern macroeconomics. Taking limits as the stochastic shocks become small, we derive a functional central limit theorem, a large deviation principle, and a moderate deviation principle. These allow us to calculate analytically the asymptotic distribution of the capital stock, and to obtain bounds on the probability that the log of the capital stock will differ from its deterministic steady state level by a given amount. This latter result can be applied to characterize the probability and frequency of large business cycles. We then illustrate our theoretical results through some simulations. We find that our results do a good job of characterizing the model economy, both in terms of its average behavior and its occasional large cyclical fluctuations.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed fro
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Williams, Noah, 2004. "Small noise asymptotics for a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 119(2), pages 271-298, December.
    • Handle: RePEc:eee:jetheo:v:119:y:2004:i:2:p:271-298
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022-0531(04)00031-6
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64, Elsevier.
    2. Araujo, A, 1991. "The Once but Not Twice Differentiability of the Policy Function," Econometrica, Econometric Society, vol. 59(5), pages 1383-1393, September.
    3. Kim, Jinill & Kim, Sunghyun Henry, 2003. "Spurious welfare reversals in international business cycle models," Journal of International Economics, Elsevier, vol. 60(2), pages 471-500, August.
    4. Santos, Manuel S, 1991. "Smoothness of the Policy Function in Discrete Time Economic Models," Econometrica, Econometric Society, vol. 59(5), pages 1365-1382, September.
    5. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, April.
    6. Judd, Kenneth L. & Guu, Sy-Ming, 1997. "Asymptotic methods for aggregate growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(6), pages 1025-1042, June.
    7. 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.
    8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    9. Campbell, John Y., 1994. "Inspecting the mechanism: An analytical approach to the stochastic growth model," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 463-506, June.
    10. Gaspar, Jess & L. Judd, Kenneth, 1997. "Solving Large-Scale Rational-Expectations Models," Macroeconomic Dynamics, Cambridge University Press, vol. 1(1), pages 45-75, January.
    11. Klebaner, F. C. & Liptser, R., 1999. "Moderate deviations for randomly perturbed dynamical systems," Stochastic Processes and their Applications, Elsevier, vol. 80(2), pages 157-176, April.
    12. Kenneth Kasa, 2004. "Learning, Large Deviations, And Recurrent Currency Crises," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 141-173, February.
    13. Manuel S. Santos & Jesus Vigo-Aguiar, 1998. "Analysis of a Numerical Dynamic Programming Algorithm Applied to Economic Models," Econometrica, Econometric Society, vol. 66(2), pages 409-426, March.
    14. William A. Brock & Leonard J. Mirman, 2001. "Optimal Economic Growth And Uncertainty: The Discounted Case," Chapters, in: W. D. Dechert (ed.), Growth Theory, Nonlinear Dynamics and Economic Modelling, chapter 1, pages 3-37, Edward Elgar Publishing.
    15. Magill, Michael J. P., 1977. "A local analysis of N-sector capital accumulation under uncertainty," Journal of Economic Theory, Elsevier, vol. 15(1), pages 211-219, June.
    16. Prandini, Joao C, 1994. "The Limiting Behaviour of Solow's Model with Uncertainty When the Variance Goes to Zero," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(5), pages 799-809, August.
    17. Santos, Manuel S, 1993. "On High-Order Differentiability of the Policy Function," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(3), pages 565-570, July.
    18. Amir, Rabah, 1997. "A new look at optimal growth under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 67-86, November.
    19. Blume, Lawrence & Easley, David & O'Hara, Maureen, 1982. "Characterization of optimal plans for stochastic dynamic programs," Journal of Economic Theory, Elsevier, vol. 28(2), pages 221-234, December.
    20. Klebaner, F. C. & Nerman, O., 1994. "Autoregressive approximation in branching processes with a threshold," Stochastic Processes and their Applications, Elsevier, vol. 51(1), pages 1-7, June.
    21. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Albeverio, Sergio & Mastrogiacomo, Elisa, 2022. "Large deviation principle for spatial economic growth model on networks," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    2. Aruoba, S. Boragan & Fernandez-Villaverde, Jesus & Rubio-Ramirez, Juan F., 2006. "Comparing solution methods for dynamic equilibrium economies," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2477-2508, December.
    3. Stutzer, Michael, 2020. "Persistence of averages in financial Markov Switching models: A large deviations approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 553(C).
    4. Robert Feicht & Wolfgang Stummer, 2010. "Complete Closed-form Solution to a Stochastic Growth Model and Corresponding Speed of Economic Recovery preliminary," DEGIT Conference Papers c015_041, DEGIT, Dynamics, Economic Growth, and International Trade.
    5. Lars J. Olson & Santanu Roy, 2006. "Theory of Stochastic Optimal Economic Growth," Springer Books, in: Rose-Anne Dana & Cuong Le Van & Tapan Mitra & Kazuo Nishimura (ed.), Handbook on Optimal Growth 1, chapter 11, pages 297-335, Springer.
    6. Dmitri Kolyuzhnov & Anna Bogomolova, 2004. "Escape Dynamics: A Continuous Time Approximation," Econometric Society 2004 Latin American Meetings 27, Econometric Society.
    7. Bruce McGough, 2006. "Shocking Escapes," Economic Journal, Royal Economic Society, vol. 116(511), pages 507-528, April.
    8. Van Nieuwerburgh, Stijn & Veldkamp, Laura, 2006. "Learning asymmetries in real business cycles," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 753-772, May.
    9. Martin Ellison & Liam Graham & Jouko Vilmunen, 2006. "Strong Contagion with Weak Spillovers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 263-283, April.
    10. Stutzer, Michael, 2013. "Optimal hedging via large deviation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(15), pages 3177-3182.
    11. Kolyuzhnov, Dmitri & Bogomolova, Anna & Slobodyan, Sergey, 2014. "Escape dynamics: A continuous-time approximation," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 161-183.
    12. Dmitri Kolyuzhnov & Anna Bogomolova, 2004. "Escape Dynamics: A Continuous Time Approximation," Econometric Society 2004 Far Eastern Meetings 557, Econometric Society.
    13. Huyen Pham, 2007. "Some applications and methods of large deviations in finance and insurance," Papers math/0702473, arXiv.org, revised Feb 2007.
    14. John Stachurski, 2009. "Economic Dynamics: Theory and Computation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012774, April.
    15. Anderson, Evan W. & Hansen, Lars Peter & Sargent, Thomas J., 2012. "Small noise methods for risk-sensitive/robust economies," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 468-500.
    16. Takanobu Kosugi, 2010. "Assessments of ‘Greenhouse Insurance’: A Methodological Review," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 17(4), pages 345-363, December.
    17. Dmitri Kolyuzhnov & Anna Bogomolova, 2004. "Escape Dynamics: A Continuous Time Approximation," Computing in Economics and Finance 2004 190, Society for Computational Economics.
    18. Sebastian Sienknecht, 2010. "On the Informational Loss Inherent in Approximation Procedures: Welfare Implications and Impulse Responses," Jena Economics Research Papers 2010-005, Friedrich-Schiller-University Jena.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lars J. Olson & Santanu Roy, 2006. "Theory of Stochastic Optimal Economic Growth," Springer Books, in: Rose-Anne Dana & Cuong Le Van & Tapan Mitra & Kazuo Nishimura (ed.), Handbook on Optimal Growth 1, chapter 11, pages 297-335, Springer.
    2. Fernández-Villaverde, J. & Rubio-Ramírez, J.F. & Schorfheide, F., 2016. "Solution and Estimation Methods for DSGE Models," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 527-724, Elsevier.
    3. Aruoba, S. Boragan & Fernandez-Villaverde, Jesus & Rubio-Ramirez, Juan F., 2006. "Comparing solution methods for dynamic equilibrium economies," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2477-2508, December.
    4. Willi Semmler, 2011. "Asset Prices, Booms and Recessions," Springer Books, Springer, number 978-3-642-20680-1, January.
    5. Lan, Hong & Meyer-Gohde, Alexander, 2014. "Solvability of perturbation solutions in DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 366-388.
    6. Mirman, Leonard J. & Morand, Olivier F. & Reffett, Kevin L., 2008. "A qualitative approach to Markovian equilibrium in infinite horizon economies with capital," Journal of Economic Theory, Elsevier, vol. 139(1), pages 75-98, March.
    7. John Stachurski, 2009. "Economic Dynamics: Theory and Computation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262012774, April.
    8. Serguei Maliar & John Taylor & Lilia Maliar, 2016. "The Impact of Alternative Transitions to Normalized Monetary Policy," 2016 Meeting Papers 794, Society for Economic Dynamics.
    9. Chen, Yu & Cosimano, Thomas F. & Himonas, Alex A., 2008. "Analytic solving of asset pricing models: The by force of habit case," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3631-3660, November.
    10. Dorofeenko, Victor & Lee, Gabriel S. & Salyer, Kevin D., 2010. "A new algorithm for solving dynamic stochastic macroeconomic models," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 388-403, March.
    11. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
    12. Mitra, Tapan & Privileggi, Fabio, 2003. "Cantor Type Invariant Distributions in the Theory of Optimal Growth under Uncertainty," Working Papers 03-09, Cornell University, Center for Analytic Economics.
    13. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007, Elsevier.
    14. Lilia Maliar & Serguei Maliar & John B. Taylor & Inna Tsener, 2020. "A tractable framework for analyzing a class of nonstationary Markov models," Quantitative Economics, Econometric Society, vol. 11(4), pages 1289-1323, November.
    15. M.S.Rafiq, 2006. "Business Cycle Moderation - Good Policies or Good Luck: Evidence and Explanations for the Euro Area," Discussion Paper Series 2006_21, Department of Economics, Loughborough University.
    16. Restrepo Ochoa, Sergio I. & Vázquez Pérez, Jesús, 2002. "Cyclical Features of Uzawa-Lucas Endogenous Growth Model," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    17. Khan, Aubhik & Thomas, Julia K., 2003. "Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 331-360, March.
    18. Benigno, Pierpaolo & Woodford, Michael, 2012. "Linear-quadratic approximation of optimal policy problems," Journal of Economic Theory, Elsevier, vol. 147(1), pages 1-42.
    19. Stephanie Becker & Lars Grüne & Willi Semmler, 2007. "Comparing accuracy of second-order approximation and dynamic programming," Computational Economics, Springer;Society for Computational Economics, vol. 30(1), pages 65-91, August.
    20. Vasilev, Aleksandar, 2009. "Business cycles in Bulgaria and the Baltic countries: an RBC approach," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 1(2), pages 148-170.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:119:y:2004:i:2:p:271-298. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.