Is There a Golden Rule for the Stochastic Solow Growth Model?
Zurich IEER Working Paper No. 33
25 Pages Posted: 16 Oct 2000
Date Written: January 2001
This paper analyzes the dependence of average consumption on the saving rate in a one-sector neoclassical Solow growth model with production shocks and stochastic rates of population growth and depreci-ation where arbitrary ergodic processes are considered. We show that the long-run behavior of the stochastic capital intensity, and hence average consumption along any sample-path, is uniquely determined by a random fixed point which depends continuously on the saving rate. This result enables us to prove the existence of a golden rule saving rate which maximizes average consumption per capita. We also show that the golden rule path is dynamically efficient. The results are illustrated numerically for Cobb-Douglas and CES production function.
Keywords: Stochastic Solow model, Golden Rule, random fixed points, random dynamical systems.
JEL Classification: E13, C60, O41
Suggested Citation: Suggested Citation