The Stochastic Growth Model by Koen Vermeylen
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Overview: This article presents the stochastic growth model. The stochastic growth model is a stochastic version of the neoclassical growth model with microfoundations, and provides the backbone of a lot of macroeconomic models that are used in modern macroeconomic research. The most popular way to solve the stochastic growth model, 1 is to linearize the model around a steady state,2 and to solve the linearized model with the method of undetermined coefficients. This solution method is due to Campbell (1994).The set-up of the stochastic growth model is given in the next section. Section 3 solves for the steady state, around which the model is linearized in section 4. The linearized model is then solved in section 5. Section 6 shows how the economy responds to stochastic shocks. Some concluding remarks are given in section 7.
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