Brief Description of Contents
The use of rational expectations growth models for policy analysis is discussed
in the Introductory chapter, where the need to produce numerical solutions is explained.
Chapter 2 presents the neoclassical Solow–Swan growth model with constant
savings, in continuous and discrete time formulations. Chapter 3 is devoted to
the optimal growth model in continuous time. The existence of an optimal steady
state is shown and stability conditions are characterized. The relationship between
the resource allocations emerging from the benevolent planner’s problem and from
the competitive equilibrium mechanism is shown. The role of the government is explained,
fiscal policy is introduced and the competitive equilibrium in an economy
with taxes is characterized. Finally, the Ricardian doctrine is analyzed. Chapter 4
addresses the same issues in discrete time formulation, allowing for numerical solutions
to be introduced and used for policy evaluation. Deterministic and stochastic
versions of the model are successively considered.
Chapter 5 is devoted to solution methods and their application to solving the optimal
growth model of an economy subject to distortionary and non-distortionary
taxes. The chapter covers some linear solution methods, implemented on linear and
log-linear approximations: the linear-quadratic approximation, the undetermined
coefficients method, the state-space approach, the method based on eigenvalueeigenvector
decompositions of the approximation to the model, and also some nonlinear
methods, like the parameterized expectations model and a class of projection
methods. Special emphasis is placed on the conditions needed to guarantee stability
of the implied solutions.
Chapter 6 introduces some endogenous growth models, in continuous and discrete
time formulations. The AK model incorporating fiscal policy instruments is
taken as a basis for analysis, both in deterministic and stochastic versions. The possibility
of dynamic Laffer curves is discussed. A more general model with nontrivial
transition, that includes the AK model as a special case, is also presented. Chapter
7 presents additional endogenous growth models. Stochastic economies with a variety
of products, technological diffusion, Schumpeterian growth, and human capital
accumulation, are all presented in detail and the appropriate solution methods are
explained. Chapters 8 and 9 are devoted to growth in monetary economies. Chapter
8 introduces the basic Sidrauski model and discusses some modelling issues that
arise in practical research in these models. The interrelation between monetary and
fiscal policy in steady state is also discussed. Special attention is paid to characterize
the feasible combinations of fiscal and monetary policies and to the appropriate
choice of policy targets. The concept of optimal rate of inflation is introduced. The
x Preface
possibilities for the design of a mix of fiscal and monetary policy in economies with
and without distorting taxation are discussed. Conditions for the non-neutrality of
monetary policy under endogenous labour supply are examined. The chapter closes
with a description of the Ramsey problem that describes the choice of optimal monetary
policy. Chapter 9 characterizes the transitional dynamics in deterministic and
stochastic monetary economies and presents numerical solution methods for deterministic
and stochastic monetary economies. Specific details are provided depending
on whether the monetary authority uses nominal interest rates or the rate
of growth of money supply as a control variable for monetary policy implementation.
Special attention is paid to the possibility of nominal indeterminacy arising as a
consequence of the specific design followed for monetary policy. The chapter closes
with a presentation of Keynesian monetary models, which are increasingly used for
actual policy making. After characterizing equilibrium conditions, a numerical solution
approach is discussed in detail.