On Endogenous Growth Under Uncertainty

Abstract

This paper incorporates uncertainty in two distinct models of endogenous growth. In both models the representative agent is uncertain about the productivity of knowledge creation, as represented by a probability measure over the relevant parameter. The main purpose of this paper is to analyze the effects of risk or volatility in productivity of knowledge creation on the decision variables and the expected long-run growth rate. Both the first and the second models may explain part of the observed negative link between volatility and growth.

Stochastic stability in monotone economies

“…The same results were applied to variants of Huggett's model with features such as habit formation, endogenous labor supply, capital accumulation, and international trade (Díaz et al 2003, Joseph and Weitzenblum 2003, Pijoan-Mas 2006, Marcet et al 2007. They were used to study the classical one-sector optimal growth model by Hopenhayn and Prescott (1992), a stochastic endogenous growth model by de Hek (1999), and a small open economy by Chatterjee and Shukayev (2012). They have been used in a wide range of overlapping generations (OLG) models with features such as credit rationing (Aghion andBolton 1997, Piketty 1997), human capital (Owen and Weil 1998, Lloyd-Ellis 2000, Cardak 2004, Couch and Morand 2005, Hidalgo-Cabrillana 2009, international trade (Ranjan 2001, Das 2006, nonconcave production (Morand and Reffett 2007), and occupational choice (Lloyd-Ellis and Bernhardt 2000, Antunes and Cavalcanti 2007).…”

On the relationship between growth and volatility

“…Of particular interest has been the relationship between short-run volatility and long-run growth. This relationship has been shown to depend on a number of factors, most notably the mechanism responsible for generating technological change and the parameters governing attitudes towards risk and uncertainty (e.g., Aghion and Saint-Paul, 1998a,b;Blackburn and Galindev, 2003;de Hek, 1999;Jones et al, 1999;Rogers, 1997, 2000). These insights have been established within the context of purely real models of the economy with real shocks and real propagation mechanisms.…”

Economic growth and abatement activities in a stochastic environment: a multi-objective approach

“…From now onward we restrict our analysis to the situation in which the conditions in both Proposition 1 and Proposition 2 are simultaneously met; note that in such a case, sufficiency requires that φ ∈ (1, 1 ). Given such a formulation of the value function, it is straightforward to derive the explicit dynamic paths of the control and state variables, by substituting the relevant expression from (16) back into (13), (14), (10) and (11).…”