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Assignment 4

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7 views

Assignment 4

Uploaded by

Ethan Li
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Macroeconomic Theory: Assignment 4

Please attach your code at the end of your solutions.


Transitional Dynamics
We apply numerical linearization to study transitional dynamics of the neo-
classical growth model when a technology shock arrives. Let the production
function be f (k) = Ak , and the utility function be CRRA:
( 1
c 1 if 6= 1
u(c) = 1 , 0
ln(c) if = 1

Let A = 1, = 0:5, = 0:8, = 0:95, = 0:5. Suppose that the economy


was initially at the steady state (For t = 0; 1; 2; 3; 4). At time t = 5, the
productivity A increases from 1 to 1:1 unexpectedly and permanently. Follow
the instructions to plot the dynamics of the economy.
1. Solve for the steady states before and after the shock
2. Linearize the dynamic system analytically at the new steady state
3. Linearize the dynamic system at the new steady state by applying the
following numerical method: for j 2 k; c,
@hj (k ; c ) hj (k + 4; c ) hj (k 4; c )
@k 24
@hj (k ; c ) hj (k ; c + 4) hj (k ; c 4)
.
@c 24
Choose the size of 4 properly to make the linearized system you obtain
in question 2 and question 3 closed to each other.
4. Find the eigenvalues and eigenvectors of the linearized system you obtain
from either quesion 2 or question 3.
5. Plot the time series of capital, consumption, output, and investment from
t = 0 to t = 30 by using the eigenvalues and eighenvectors.
6. Now consider another economy which has the same (A, , , ) as the
original economy does, but its degree of risk aversion, , is equal to 0:1.
At time t = 5, the productivity A increases from 1 to 1:1 unexpectedly
and permanently. Compare the dynamic path in the original economy and
the new economy.

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