Guido Cazzavillan () (Department of Economics, University Of Venice Ca’ Foscari) Patrick Pintus (Universitè de la Mèditerranée and GREQAM-IDEP, France)
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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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Paper provided by University of Venice "Ca' Foscari", Department of Economics in its series Working Papers with number
2006_37.
Find related papers by JEL classification: C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - 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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