Production, Growth and Business Cycles: Technical Appendix

The methods used in our two survey papers on real business cycles (King,Plosser and Rebelo, 1988a,b) are detailed in this document. Our presentationof the basic neoclassical model of growth and business cycles is broken intothree parts. First, we describe the model and its steady state, discussing:the structure of the environment including government policy rules; the natureof optimal individual decisions and the dynamic competitive equilibrium;technical restrictions to insure steady state growth; comparable restrictionson preferences and policy rules; stationary levels and ratios in the steadystate; and the nature of a transformed economy. Second, we detail methods forstudying near steady-state dynamics, considering: the linear approximationapproach; the rational expectations solution algorithm; the nature ofalternative solutions; and the special case of the fixed labor model. Third,we discuss the computation of simulations, moments and impulse responses.The objective of this appendix is to provide a detailed analysis of aneoclassical economy that is sufficiently flexible to permit: (a) exogenoussteady state growth; (b) distorting tax rules of various sorts; and (c) timevarying government spending. Although we do not focus on all of these issuesin the present discussion, other investigations in progress will utilize thisframework. The appendix is divided into three main parts. Part A describes theartificial economy under study and analyses its steady state, Part B developsmethods to study approximate dynamics around the steady state, and Part Cderives a set of formulas for generating population moments. This technicalappendix is designed to serve two functions. First, it develops thetheoretical material in Sections 2 and 3 of the main text in more depths.Second, it serves as a detailed guide to PC-MATLAB programs for computingdynamic equilibria, written by King and Rebelo in the Spring of 1987. Notationin programs and the technical appendix has been detailed as closely asfeasible. © 2002 Kluwer Academic Publishers.