On the Solution of the Growth Model with Investment-Specific Technological Change

Jesús Fernández-Villaverde and Juan Francisco Rubio-Ramírez
Working Paper 2004-39
December 2004

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Recent work by Greenwood, Hercowitz, and Krusell (1997 and 2000) and Fisher (2003) has emphasized the importance of investment-specific technological change as a main driving force behind long-run growth and the business cycle. This paper shows how the growth model with investment-specific technological change has a closed-form solution if capital fully depreciates. This solution furthers our understanding of the model, and it constitutes a useful benchmark to check the accuracy of numerical procedures to solve dynamic macroeconomic models in cases with several state variables.

JEL classification: E10, E32, D90

Key words: growth model with investment-specific technological change, closed-form solution, long-run growth, business cycle fluctuations

The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Juan F. Rubio-Ramírez, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, USA, 404-498-8057, juan.rubio@atl.frb.org.