Is There a Golden Rule for the Stochastic Solow Growth Model?

Posted: 18 Jul 2001

See all articles by Klaus Reiner Schenk-Hoppé

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

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Abstract

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 depreciation 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

Schenk-Hoppé, Klaus Reiner, Is There a Golden Rule for the Stochastic Solow Growth Model?. Available at SSRN: https://ssrn.com/abstract=274582

Klaus Reiner Schenk-Hoppé (Contact Author)

University of Manchester - Department of Economics ( email )

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Norwegian School of Economics (NHH) - Department of Finance ( email )

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