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Endogenous business cycles and dynamic inefficiency

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  • Guido Cazzavillan
  • Patrick A. Pintus

Abstract

This 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 agents’ 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 Info

Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 2 (2006)
Issue (Month): 3-4 ()
Pages: 279-294

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Handle: RePEc:bla:ijethy:v:2:y:2006:i:3-4:p:279-294

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  1. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, Econometric Society, vol. 53(5), pages 995-1045, September.
  2. Subir Chattopadhyay & Piero Gottardi, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Working Papers 99-12, Brown University, Department of Economics.
  3. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
  4. David Cass & Menahem E. Yaari, 1966. "A Re-examination of the Pure Consumption Loans Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 74, pages 353.
  5. de Vilder, Robin, 1996. "Complicated Endogenous Business Cycles under Gross Substitutability," Journal of Economic Theory, Elsevier, vol. 71(2), pages 416-442, November.
  6. Samuelson, Larry, 1980. "The Golden Rule with Endogenous Labor Participation Rate," American Economic Review, American Economic Association, vol. 70(4), pages 752-55, September.
  7. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2005. "Indeterminacy in Dynamic Models: When Diamond Meets Ramsey," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5255, C.E.P.R. Discussion Papers.
  8. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Tito Pietra, 2004. "Sunspots, indeterminacy and Pareto inefficiency in economies with incomplete markets," Economic Theory, Springer, Springer, vol. 24(3), pages 687-699, October.
  10. Benhabib, Jess & Laroque, Guy, 1986. "On Competitive Cycles in Productive Economies," Working Papers, C.V. Starr Center for Applied Economics, New York University 86-19, C.V. Starr Center for Applied Economics, New York University.
  11. Benveniste, Lawrence M., 1976. "A complete characterization of efficiency for a general capital accumulation model," Journal of Economic Theory, Elsevier, vol. 12(2), pages 325-337, April.
  12. d ASPREMONT, Claude, & DOS SANTOS FERREIRA , Rodolphe & GERARD-VARET , Louis-André, 1994. "Market Power, Coordination Failures and Endogenous Fluctuations," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1994068, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Geanakoplos, J D & Polemarchakis, H M, 1986. "Walrasian Indeterminacy and Keynesian Macroeconomics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(5), pages 755-79, October.
  14. Guido Cazzavillan & Patrick A. Pintus, 2004. "Robustness of Multiple Equilibria in OLG Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 456-475, April.
  15. Luigi Montrucchio, 2004. "Cass transversality condition and sequential asset bubbles," Economic Theory, Springer, Springer, vol. 24(3), pages 645-663, October.
  16. Cazzavillan, Guido, 2001. "Indeterminacy and Endogenous Fluctuations with Arbitrarily Small Externalities," Journal of Economic Theory, Elsevier, vol. 101(1), pages 133-157, November.
  17. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
  18. Cazzavillan, Guido & Pintus, Patrick A., 2006. "Capital externalities in OLG economies," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(7), pages 1215-1231, July.
  19. Dixon,Huw David & Rankin,Neil, 1995. "The New Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521479479, 9.
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Cited by:
  1. Nourry, Carine & Venditti, Alain, 2011. "Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 164-169, March.
  2. Jean-Pierre Drugeon & Carine Nourry & Alain Venditti, 2009. "On efficiency and local uniqueness in two-sector OLG economies," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00439241, HAL.
  3. Cazzavillan, Guido & Pintus, Patrick, 2007. "Dynamic inefficiency in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 137(1), pages 754-759, November.
  4. repec:hal:wpaper:halshs-00439241 is not listed on IDEAS

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