Variables in RBC

Stochastic simulations
1

Hello Prof,

In order to solve for Steady State values in RBC models, King and Rebello (1999) which you have replicate it on GitHub, transformed the variables by dividing by X ( deterministic component of productivity which grows at \gamma rate) , As a result, law of motion of capital is transformed to:

\gamma * k_{t+1} = (1-\delta)k_{t} + i

However, in almost all RBC that I work with, the term \gamma is not there, which signifies that transformation was not carried out to eliminate growth steady state to come up with steady state values . Why? Is it because RBC models assume \gamma= (1+g)(1+n)=1 and therefore g & n are 0 ?

Many thanks.

2

Most models are already set up in detrended form where the growth trend is already subsumed in other parameters and the steady state values. For typical sizes of \gamma, considering it to be equal to 1 would also not make a big difference.

3

Thank you Prof. ,

Just to clarify, you mean setting \gamma to 1 would suffice in transforming growth models to RBC type of models ? Or it does not leads to RBC type of model models ?

Best,

4

Yes. That factor is 1.03 and therefore close to 1 in any case.

5

Thank you Prof. :slight_smile: