Global dynamics in macroeconomics: an overlapping generations example
In this paper, we present some techniques used in the dynamical systems literature that let us characterize the stable and unstable manifolds of a given dynamical system. As a result, we can study how an economy behaves as it moves far away from the steady state in an environment where economic agents do not face uncertainty. The underlying idea behind these methods is to compute the manifolds nonlocally by exploiting an invariance condition that analytically describes these manifolds. In order to illustrate these techniques, we present a general equilibrium model under two different policy regimes demonstrating that local and global dynamics of an economic system can be substantially different.
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