Working Papers

October 1987, No. 87-6

Aggregate Fluctuations and Economic Growth: A Case of Random-Walk Hypothesis

Ching-Sheng Mao

This paper presents a model economy in which the 'balanced' growth is determined endogenously. The growth process in this economy does not depend on exogenous specifications such as human capital accumulation or technological progress. Rather, it is determined within the model and governed by two economic forces: (1) the intertemporal substitution of consumption and labor and (2) the intertemporal production opportunities. In equilibrium, the real quantities (i.e., consumption, capital, employment and output) will all evolve as logarithm random walks with drift. Therefore, the time series generated by this model is not trend stationary and the propagation of technological disturbances is permanent. This result is consistent with the empirical findings of Nelson and Plosser (1982).

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