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October 9, 2013, Christopher D. Carroll BrockMirman

The Brock-Mirman Stochastic Growth Model
Brock and Mirman (1972) provided the rst optimizing growth model with unpre-
dictable (stochastic) shocks.
The social planners goal is to solve the problem:
max

n=0

n
log C
t+n
(1)
s.t.
Y
t
= A
t
K

t
(2)
K
t+1
= Y
t
C
t
(3)
where A
t
is the level of productivity in period t. (We describe the assumptions about
A
t
below). Note the key assumption that the depreciation rate on capital is 100
percent.
The rst step is to rewrite the problem in Bellman equation form
V
t
(K
t
) = max
{Ct}
log C
s
+ V
t+1
(A
t
K

t
C
t
) (4)
and take the rst order condition:
u

(C
t
) = E
t
_
A
t+1
K
1
t+1
u

(C
t+1
)

1
C
t
= E
t
_
A
t+1
K
1
t+1
C
t+1
_
1 = E
t
_

_
A
t+1
K
1
t+1
. .
R
t+1
C
t
C
t+1
_

_
where our denition of R
t+1
helps clarify the relationship of this equation to the
usual consumption Euler equation (and you should think about why this is the right
denition of the interest factor in this model).
Now we show that this FOC is satised by a rule that says C
t
= Y
t
, where
= 1 . To see this, note rst that the proposed consumption rule implies that
K
t+1
= (1 )Y
t
.
The rst order condition says
1 = E
t
_

Y
t+1
K
t+1
Y
t
Y
t+1
_
= E
t
_

Y
t
K
t+1
_
= E
t
_

Y
t
Y
t
C
t
_
= E
t
_

Y
t
Y
t
(1 )
_
= E
t
_

1
(1 )
_
(1 ) =
= 1 .
An important way of judging a macroeconomic model and deciding whether it
makes sense is to examine the models implications for the dynamics of aggregate
variables. Dening lower case variables as the log of the corresponding upper case
variable, this model says that the dynamics of the capital stock are given by
K
t+1
= (1 )Y
t
(5)
= A
t
K

t
(6)
k
t+1
= log + a
t
+ k
t
(7)
which tells us that the dynamics of the (log) capital stock have two components: One
component (a
t
) mirrors whatever happens to the aggregate production technology;
the other component is serially correlated with coecient equal to capitals share
in output.
Similarly, since log output is simply y = z + k, the dynamics of output can be
obtained from
y
t+1
= a
t+1
+ k
t+1
(8)
= (log K
t+1
) + a
t+1
(9)
= (log Y
t
) + a
t+1
(10)
= (y
t
+ log ) + a
t+1
(11)
so the dynamics of aggregate output, like aggregate capital, reect a component that
mirrors z and a serially correlated component with serial correlation coecient .
The simplest assumption to make about the level of technology is that its log follows
a random walk:
a
t+1
= a
t
+
t+1
. (12)
Under this assumption, consider the dynamic eects on the level of output from
a unit positive shock to the log of technology in period t (that is,
t+1
= 1 where

s
= 0 s = t + 1). Suppose that the economy had been at its original steady-state
level of output y in the prior period. Then the expected dynamics of output would
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Figure 1 Dynamics of Output With a Random Walk Shock

Time
Output
1/(1-

)
1+

1+

+

1
2
be given by
y
t
= y + a
t
(13)
E
t
[y
t+1
] = y + a
t
+ a
t
(14)
E
t
[y
t+2
] = y + a
t
+ a
t
+
2
a
t
(15)
and so on, as depicted in gure 1.
Also interesting is the case where the level of technology follows a white noise
process,
a
t+1
= z +
t+1
. (16)
The dynamics of income in this case are depicted in gure 2.
The key point of this analysis, again, is that the dynamics of the model are governed
by two components: The dynamics of the technology shock, and the assumption about
the saving/accumulation process.
For further analysis, consider a nonstochastic version of this model, with A
t
= 1 t.
The consumption Euler equation is
C
t+1
C
t
= (R
t+1
)
1/
But this is an economy with no technological progress, so the steady-state interest
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Figure 2 Dynamics of Output With A White Noise Shock
Output
y
Time
t t+1 t+2
y + 1
y +
y +
2

rate must take on the value such that C
t+1
/C
t
= 1. Thus we must have R = 1 or
R = 1/.
In the usual model the net interest rate r is equal to the marginal product of capital
minus depreciation, r = F

(K) , so the gross interest rate is R = 1 + F

(K) .
But in this case we have = 1 so R = F

(K).
The unconditional expectation of the interest rate, E(log[F

(K)]), is given by
E(log[F

(K)]) = ( 1) log[] + E(log[F

(K)]) +E[]
E(log[F

(K)])(1 ) = ( 1) log[] (17)

E(log[F

(K)]) = log[1/] (18)

E(log[F

(K)]) = 0 (19)
Previously we derived the proposition that
R = 1 (20)
F

(K) = 1 (21)
log[F

(K)] = 0 (22)
but since this is a model in which R = F

(K), this is eectively identical to the

steady-state in the nonstochastic version of the model. Thus, in this special case,
the modied golden rule that applies in expectation is identical to the one that
characterizes the perfect foresight model. The only dierence that moving to the
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stochastic version of the model makes is to add an expectations operator E to the
LHS of the nonstochastic models equation.
References (click to download .bib le)
Brock, William, and Leonard Mirman (1972): Optimal Economic Growth
and Uncertainty: The Discounted Case, Journal of Economic Theory, 4(3), 479
513.
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