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Business Cycles, Bifurcations and Chaos in a Neo-Classical Model with Investment Dynamics

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Author Info

  • Stéphane Hallegatte

    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - Ecole des Ponts ParisTech - Ecole Nationale du Génie Rural des Eaux et Forêts, CNRM - Centre National de Recherches Météorologiques - Aucune)

  • Michael Ghil

    (Plateforme Environnement de l'ENS - Aucune, Department of Atmospheric and Oceanic Sciences and Institute of Geophysics and Planetary Physics - Aucune)

  • Patrice Dumas

    ()
    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - Ecole des Ponts ParisTech - Ecole Nationale du Génie Rural des Eaux et Forêts, Plateforme Environnement de l'ENS - Aucune)

  • Jean-Charles Hourcade

    (CIRED - Centre International de Recherche sur l'Environnement et le Développement - Centre de coopération internationale en recherche agronomique pour le développement [CIRAD] : UMR56 - CNRS : UMR8568 - École des Hautes Études en Sciences Sociales [EHESS] - Ecole des Ponts ParisTech - Ecole Nationale du Génie Rural des Eaux et Forêts)

Abstract

This paper is motivated by the rising interest in assessing the effect of disruptions in resources and environmental conditions on economic growth. Such an assessment requires, ultimately, the use of truly integrated models of the climate and economic systems. For these purposes, we have developed a Non-Equilibrium Dynamic Model (NEDyM) by introducing investment dynamics and nonequilibrium effects into a Solow growth model. NEDyM can reproduce various economic regimes, such as manager- or shareholder-driven economies, and permits one to examine the effects of disruptions on the economy, given either an assumption of steady-state growth or an assumption of business cycles with transient disequilibrium. We have applied NEDyM to an idealized economy that resembles in certain respects the 15-state European Union in 2001. The key parameter in NEDyM is investment flexibility. For certain values of this parameter, the model reproduces classical business cycles with realistic characteristics; in particular, NEDyM captures the cycles' asymmetry, with a longer growth phase and more rapid contraction. The cyclical behavior is due to the investment­ profit instability and is constrained by the increase in labor costs and the inertia of production capacity. For somewhat greater investment flexibility, the model exhibits chaotic behavior, because a new constraint intervenes, namely limited investment capacity. The preliminary results presented here show that complex behavior in the economic system may be due entirely, or at least largely, to deterministic, intrinsic factors, even if the economic long-term equilibrium is neo-classical in nature. In the chaotic regime, moreover, slight shocks ­ such as those due to natural or man-made catastrophes ­ may lead to significant changes in the economic system.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00007196.

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Date of creation: 2008
Date of revision:
Publication status: Published, Journal of Economic Behavior and Organization, 2008, 67, 1, 57-77
Handle: RePEc:hal:journl:halshs-00007196

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00007196
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Web page: http://hal.archives-ouvertes.fr/

Related research

Keywords: Macroeconomic dynamics; Nonequilibrium modeling; Business cycles; Investment flexibility;

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References

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Citations

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Cited by:
  1. Orlando Gomes, 2010. "Endogenous Growth, Price Stability And Market Disequilibria," Metroeconomica, Wiley Blackwell, Wiley Blackwell, vol. 61(1), pages 3-34, 02.
  2. repec:hal:wpaper:hal-00866431 is not listed on IDEAS
  3. Kemp-Benedict, Eric, 2012. "The national bioenergy investment model: Technical documentation," MPRA Paper 37835, University Library of Munich, Germany.
  4. Elena Olmedo, 2014. "Forecasting Spanish Unemployment Using Near Neighbour and Neural Net Techniques," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 43(2), pages 183-197, February.
  5. Gomes, Orlando, 2012. "Information stickiness in general equilibrium and endogenous cycles," Economics Discussion Papers 2012-46, Kiel Institute for the World Economy.
  6. Gomes, Orlando, 2009. "A two-dimensional non-equilibrium dynamic model," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 20(3), pages 221-238, September.
  7. Céline Guivarch & Stéphane Hallegatte & Renaud Crassous, 2009. "The Resilience of the Indian Economy to Rising Oil Prices as a Validation Test for a Global Energy-Environment-Economy CGE Model," Post-Print, HAL hal-00566971, HAL.
  8. Hallegatte, Stéphane & Dumas, Patrice, 2009. "Can natural disasters have positive consequences? Investigating the role of embodied technical change," Ecological Economics, Elsevier, Elsevier, vol. 68(3), pages 777-786, January.
  9. Stéphane Hallegatte & Michael Ghil, 2007. "Endogenous Business Cycles and the Economic Response to Exogenous Shocks," Working Papers, Fondazione Eni Enrico Mattei 2007.20, Fondazione Eni Enrico Mattei.

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