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Some results on the solution of the neoclassical growth model

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  • Jesús Fernández-Villaverde
  • Juan F. Rubio-Ramirez

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.

Suggested Citation

  • Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez, 2003. "Some results on the solution of the neoclassical growth model," FRB Atlanta Working Paper 2003-34, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2003-34
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    1. 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.
    2. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Manuel S. Santos, 2006. "Convergence Properties of the Likelihood of Computed Dynamic Models," Econometrica, Econometric Society, vol. 74(1), pages 93-119, January.

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    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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