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Endogenous Business Cycles and Dynamic Inefficiency

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  • Guido Cazzavillan

    () (Department of Economics, University Of Venice Ca’ Foscari)

  • Patrick Pintus

    (Universitè de la Mèditerranée and GREQAM-IDEP, France)

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

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2006_37.

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Length: 32 pagine
Date of creation: 2006
Date of revision:
Handle: RePEc:ven:wpaper:2006_37

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Related research

Keywords: Overlapping generations; endogenous labor supply; multiple equilibria; endogenous fluctuations; dynamic inefficiency;

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References

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  1. 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.
  2. Chattopadhyay, Subir & Gottardi, Piero, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Journal of Economic Theory, Elsevier, vol. 89(1), pages 21-67, November.
  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. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2005. "Indeterminacy in Dynamic Models: When Diamond Meets Ramsey," CEPR Discussion Papers 5255, C.E.P.R. Discussion Papers.
  5. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  6. Benhabib, Jess & Laroque, Guy, 1986. "On Competitive Cycles in Productive Economies," Working Papers 86-19, C.V. Starr Center for Applied Economics, New York University.
  7. Cazzavillan, Guido, 2001. "Indeterminacy and Endogenous Fluctuations with Arbitrarily Small Externalities," Journal of Economic Theory, Elsevier, vol. 101(1), pages 133-157, November.
  8. Edmond S. Phelps, 1964. "Second Essay on the Golden Rule of Accumulation," Cowles Foundation Discussion Papers 173, Cowles Foundation for Research in Economics, Yale University.
  9. 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.
  10. David Cass & Menahem E. Yaari, 1965. "A Re-Examination of the Pure Consumption Loans Model," Cowles Foundation Discussion Papers 195, Cowles Foundation for Research in Economics, Yale University.
  11. Tito Pietra, 2004. "Sunspots, indeterminacy and Pareto inefficiency in economies with incomplete markets," Economic Theory, Springer, vol. 24(3), pages 687-699, October.
  12. Geanakoplos, J D & Polemarchakis, H M, 1986. "Walrasian Indeterminacy and Keynesian Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 755-79, October.
  13. 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.
  14. Grandmont Jean-michel & Laroque Guy, 1987. "Stability, expectations, and predetermined variables," CEPREMAP Working Papers (Couverture Orange) 8714, CEPREMAP.
  15. Luigi Montrucchio, 2004. "Cass transversality condition and sequential asset bubbles," Economic Theory, Springer, vol. 24(3), pages 645-663, October.
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Cited by:
  1. Drugeon, Jean-Pierre & Nourry, Carine & Venditti, Alain, 2010. "On efficiency and local uniqueness in two-sector OLG economies," Mathematical Social Sciences, Elsevier, vol. 59(1), pages 120-144, January.
  2. Guido Cazzavillan & Patrick Pintus, 2006. "Dynamic Inefficiency in an Overlapping Generations Economy with Production," Working Papers 2006_40, Department of Economics, University of Venice "Ca' Foscari".
  3. Carine Nourry & Alain Venditti, 2009. "Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy," Working Papers halshs-00439240, HAL.

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