Title: An Alternative Analytical Approach to Solving Dynamic Stochastic General Equilibrium Models with Endogenous Growth
Reference Number: 1056
Publication Date: November 2002
JEL Classifcation: E32, O40

Paul LAU Sau Him
The University of Hong Kong

Campbell (1994) argues that a clear understanding of dynamic stochastic general equilibrium models can best be achieved by an analytical approach, and he 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 procedure to dynamic stochastic models by loglinearizing the utility function and the capital accumulation equation. This approximate solution has a simple analytical form; thus, it is relatively easy to obtain further results based on the solution. Comparing its performance with that of the conventional method, it is further argued that the suggested solution procedure is most useful for dynamic stochastic models exhibiting endogenous growth.

Key words: Dynamic stochastic libgeneral equilibrium models; Approximate analytical solution; Endogenous growth

Last modified: 01/24/2007