Trend analysis in two standard growth models

Abstract

This paper analyzes the trend processes characterized by two standard growth models using simple econometrics. The first model is the basic neoclassical growth model that postulates a deterministic trend for output. The second model is the Uzawa-Lucas model that postulates a stochastic trend for output. The aim is to understand how the different trend processes for output assumed by these two standard growth models determine the ability of each model to explain the observed trend processes of other macroeconomic variables such as consumption and investment. The results show that the two models reproduce the output trend process. Moreover, the results show that the basic growth model captures properly the consumption trend process, but fails in characterizing the investment trend process. The reverse is true for the Uzawa-Lucas model.