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Production, Growth And
Business Cycles
By Robert G. King, Charles I. Plosser
and Sergio T. Rebelo
Presented By Erik Grothman, John
Hudson and Nate Drunasky
Introduction
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Neoclassical Model
First Order Conditions
Approximation Method
Calibration Table
Dynamics with Graphs
Neoclassical Model
• Preferences
– β = Discount Rate
– C = Consumption
– L = Leisure
• Production Possibilities
– K = Capital Stock
– N = Labor input
– X = Technological Variations
– A = Changes in Total Productivity
Continued…
• Capital Accumulation
– I = Gross Investment
–
= Rate of Depreciation of Capital
• Resource Constraints
– Total time allocated to work and
leisure must not exceed the endowment
– Total uses of the commodity must not exceed
output
Optimization Problem
• Lagrangian Theorem
– Y-C-I
– Y= GDP, C= Consumption, and I= Investments
First Order Conditions
Approximation Method
• Approximation of the intertemporal efficiency
condition implies that:
–
–
= Shadow Price
= Technology Shifts
Approximation Method
• Approximation of the Resource constrain
implies
– 𝑠𝑐 = Consumption Shares
– 𝑠𝑖 = Investment Shares
Linearize Equations
• Since you cannot derive the previous
equations they try to linearize the lines by
using the equations below
Calibration Model
Dynamics
Dynamics