A dividend process with independent shocks both to the current level of dividends dt and to the expected long-run rate of growth of dividends gt:
Why this dividend process? Because if we then have an required expected rate of return r and a value function V(rt,gt, then the one-period arbitrage condition:
leads us to the highly-tractable Gordon equation:
Thus we can have big swings in the desired capital stock and thus bigger swings in the desired rate of change of investment without having to have massive shocks to the current level of technology: we can have depressions without requiring--as is usual in real business-cycle models--massive technological amnesia.