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Poverty traps and business cycles in a stochastic overlapping generations economy with S-shaped law of motion

  • Schenk-Hoppe, Klaus Reiner

This paper contributes to the understanding of stochastic economic dynamics with S-shaped law of motion. Applying random dynamical systems theory, we obtain a complete analysis of a stochastic OLG growth model. In the long-run the economy converges either to a state with no capital (poverty trap) or a sample path of a random fixed point (business cycle). The threshold capital stock separating both regimes is a random variable that depends on the future realization of the shocks; this critical level cannot be identified using past observations. Supply of outside capital therefore has an uncertain effect. Policy recommendations are given which cannot be obtained employing Markov equilibria. A numerical illustration is provided.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 27 (2005)
Issue (Month): 2 (June)
Pages: 275-288

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Handle: RePEc:eee:jmacro:v:27:y:2005:i:2:p:275-288
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  1. Klaus Reiner Schenk-Hoppé & Björn Schmalfuss, . "Random Fixed Points in a Stochastic Solow Growth Model," IEW - Working Papers 065, Institute for Empirical Research in Economics - University of Zurich.
  2. repec:oup:qjecon:v:105:y:1990:i:2:p:501-26 is not listed on IDEAS
  3. Wang, Yong, 1994. "Stationary Markov Equilibria in an OLG Model with Correlated Production Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 731-44, August.
  4. Schenk Hopp , Klaus Reiner, 2002. "Is There A Golden Rule For The Stochastic Solow Growth Model?," Macroeconomic Dynamics, Cambridge University Press, vol. 6(04), pages 457-475, September.
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