Abstract

ROJAS, Germán. Solving a neoclassical growth model with public capital using the parameterized expectation method. Inv. Econ [online]. 1999, vol.59, n.230, pp.121-147. ISSN 0185-1667.

In this paper we use numerical techniques to solve a stochastic growth model in which public capital is productive. We find optimal paths for consumption and investment, given a set of functional forms and parameters for preferences and technology. Public capital is modeled as a stochastic process, as are the technology shock and the shock to preferences. In solving this model we use a numerical technique known as the Parameterized Expectation Method (PEA) proposed by Marcet (1989). This method allows us to solve problems with several state variables without falling into the "curse of dimensionality''. We also present a sensitivity analysis and stress the role of public investment in the decision to accumulate private capital. We conclude that adequate identification of the parameters governing the relationship of public capital to growth is essential for good policy design.

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