Quantitative Macroeconomics

Growth II - Simulating a Simple Growth Model

Seda Basihos & Andreas Tischbirek

Department of Economics
HEC Lausanne

19 October 2020
Introduction

Last week: We confronted the Solow model with cross-sectional data

in a way proposed by Mankiw, Romer and Weil (1992)
Today: Matlab programming exercise – Dynamic simulations of the
Solow model and comparison to macro time series from the US
To be able to simulate the model, one needs to work with a
discrete-time version of it
Before we (you!) get started with the programming, brief look at the
key equations in discrete time

UNIL-HEC Solow Model Simulations 19 October 2020

Solow model - Key equations
Production function (note that it is not in Harrod-neutral form)
Yt = At Ktα Nt1−α (1)
Law of motion of capital
Kt+1 = (1 − δ)Kt + It (2)
Investment
It = sYt (3)
Laws of motion of technology and labour
Nt+1
−1=n (4)
Nt
At+1
−1=g (5)
At
Budget constraint
Yt = Ct + It (6)

UNIL-HEC Solow Model Simulations 19 October 2020

Calibration

To simulate the model, numerical values have to be chosen for the

model parameters
Use the following commonly employed values

Capital share of income = 1/3

Depreciation rate of capital = 0.08
Saving rate = 0.1
Population growth rate = 0.015
TFP growth rate = 0.015

Note that in principle these values can (and should) be measured very
precisely from the data

UNIL-HEC Solow Model Simulations 19 October 2020

Starting Values

The file “QM6 data.mat” contains

US GDP in 2009 prices
the corresponding GDP deflator, an index which equals 100 in 2009
The first data point in the time series is from 1959, accordingly make
1959 the starting point for your simulation and work in 1959 prices
throughout
In order to choose the remaining starting values, note that
the size of the US labour force was 68.4 million (0.0684bn) in 1959
the non-residential fixed private capital stock was $411.7bn (in 1959
prices)
knowing Y1959 , K1959 and N1959 , one can back out A1959 using the
production function

UNIL-HEC Solow Model Simulations 19 October 2020

Instructions

Simulate the model outlined before for T = 100 periods

Plot the log of simulated output against the trend component of log
real output in the US (see QM6 data.mat), where you obtain the
trend component of the time series in the data using the
Hodrick-Prescott filter (with λ = 100)
Consider the historical development of the saving rate in the US
(data can be found at
https://research.stlouisfed.org/fred2/series/PSAVERT)
Split the sample into three time intervals that can be represented by
different saving rates, simulate the model using a different saving rate
for each interval that you identify and plot log output against the
trend-component of the data as above

UNIL-HEC Solow Model Simulations 19 October 2020