Stochastic Growth Model

Stochastic Growth Model

Briefly it’s about

• 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, is to linearize the model around a steady state, and to solve the linearized model with the method of undetermined coefficients

Explanation

• Microfoundations means that the objectives of the economic agents are formulated explicitly, and that their behavior is derived by assuming that they always try to achieve their objectives as well as they can.
• A steady state is a condition in which a number of key variables are not changing. In the stochastic growth model, these key variables are for instance the growth rate of aggregate production, the interest rate and the capital-output-ratio.

1st step

• So for this model you should know macroeconomic theories and than you should formulate them or you want to analize GDP you can just get the formula of GDP like C+I+G+Xn or you should find other steady state or factor can influence the GDP positively or negetively.

• Then to solve the linearized model or calculating the coefficients of model .
• For example GDP= 5C+2I+3G+Xn

• And according to the theories , you should get the objective .
• For example :
• If we can make the consumption 5bn and government spending 3bn , investment 1bn, net export 3bn , we get the the highest GDP as potential

• You may say that higher of every component of GDP higher GDP , it maybe true but there is relation between the components of GDP so higher level of some of them may influence negatively to other components or steady states.