Growth regressions in business cycle models

Abstract

We derive a convergence regression using all the restrictions implied by the stochastic growth model. Therefore, the stochastic structure is built into the model as a productivity shock and not just added as an error term. In this way, we take the view that growth and fluctuation are not distinct phenomena, and show that the deviations from the growth regression are compatible with the size of the technological shocks in business cycle theory.

Notes

¹ He also considers exogenous technological progress and population growth, but it does not make any difference here and only makes notation more cumbersome.

² This value was obtained using data for the United States from 1900 to 1990.