Endogenous business cycles and dynamic inefficiency
AbstractThis paper explores how the occurrence of local indeterminacy and endogenous business cycles relates to dynamic inefficiency, as defined by Malinvaud (1953), Phelps (1965) and Cass (1972). We follow Reichlin (1986) and Grandmont (1993) by considering a two-period OLG model of capital accumulation with labor-leisure choice into the first-period of agentsâ life and consumption in both periods. We first show that local indeterminacy and Hopf bifurcation are necessarily associated with a capital-labor ratio that is, at steady state, larger than the Golden Rule level. Consequently, paths converging asymptotically towards the steady state are shown to be dynamically inefficient, as there always exists another trajectory that starts with the same initial conditions and produces more aggregate consumption at all future dates. More surprising, however, is our main result showing that stable orbits, generated around a dynamically inefficient steady state through a supercritical Hopf bifurcation, may, in contrast, be dynamically efficient.
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Bibliographic InfoArticle provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.
Volume (Year): 2 (2006)
Issue (Month): 3-4 ()
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1742-7355
Other versions of this item:
- Guido Cazzavillan & Patrick Pintus, 2006. "Endogenous Business Cycles and Dynamic Inefficiency," Working Papers 2006_37, Department of Economics, University of Venice "Ca' Foscari".
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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