An avi-movie which shows the …

An avi-movie which shows the simulation of a stripped-down stochastic neoclassical growth model has been uploaded

When you run it you should right-click on the movie and choose "Full Screen".

What has been done is write up the recursive problem, numerically solve for the optimal, stationary decision rules, then draw a sequence of stochastic shocks to total factor productivity, and use these to compute sequences of optimal consumption and investment decisions in this uncertain environment.

For each figure, the solid blue line is the expected values and the fan is 1/3, 2/3 and 3/3 std. dev.

The way you might think about it is: Expected value of total factor productivity was z1 (the solid blue line), but the realization was z2 (the red circle). Given the realization of z, the individuals update their information set and plans for future decisions. Before the realization of z, the expected consumption decision was c1 (the solid blue line) and expected investment decision was x1 (again, the solid blue line). As new information becomes available, the consumption decision becomes c2 (a red circle) and investment decision becomes x2 (again, a red circle). The individuals will then update their information sets, illustrated by the fans.

This is very preliminary. All feedback will be appreciated.