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Time Preference and Cyclical Endogenous Growth in an AK Growth Model

  • Orlando Gomes

    (Escola Superior de Comunicação Social, IPL; UNIDE/ISCTE – ERC)

The paper develops an AK endogenous growth model with an endogenously determined rate of intertemporal preference. Following some of the related literature, we assume that the degree of impatience that is revealed by the representative agent, regarding future consumption, depends on income. To be precise, the proposed framework establishes a link between the output gap and the discount rate attached to the sequence of future utility functions. We analyze both local and global dynamics. From a local analysis point of view, a variety of stability results is possible to obtain, depending on parameter values. The study of global dynamics allows finding endogenous business cycles in the circumstance in which the representative agent overlooks one essential requirement for optimality. On a second stage, the model is extended to include the role of leisure and, in this case, endogenous fluctuations are compatible with full rationality.

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Article provided by Faculdade de Economia, Universidade de Coimbra in its journal Notas Económicas.

Volume (Year): (2008)
Issue (Month): 28 (December)
Pages: 32-55

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Handle: RePEc:gmf:journl:y:2008:i:28:p:32-55
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  1. Epstein, Larry G., 1987. "A simple dynamic general equilibrium model," Journal of Economic Theory, Elsevier, vol. 41(1), pages 68-95, February.
  2. Cellarier, Laurent, 2006. "Constant gain learning and business cycles," Journal of Macroeconomics, Elsevier, vol. 28(1), pages 51-85, March.
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  8. Jang-Ting Guo & Kevin Lansing, 1999. "Fiscal policy, increasing returns, and endogenous fluctuations," Working Papers in Applied Economic Theory 99-08, Federal Reserve Bank of San Francisco.
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  11. Samwick, Andrew A., 1998. "Discount rate heterogeneity and social security reform," Journal of Development Economics, Elsevier, vol. 57(1), pages 117-146, October.
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  13. Boldrin, Michele & Nishimura, Kazuo & Shigoka, Tadashi & Yano, Makoto, 2001. "Chaotic Equilibrium Dynamics in Endogenous Growth Models," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 97-132, January.
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  15. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 729-58, August.
  16. Jean-Pierre Drugeon, 1998. "A model with endogenously determined cycles, discounting and growth," Economic Theory, Springer, vol. 12(2), pages 349-369.
  17. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
  18. Nishimura, Kazuo & Sorger, Gerhard & Yano, Makoto, 1994. "Ergodic Chaos in Optimal Growth Models with Low Discount Rates," Economic Theory, Springer, vol. 4(5), pages 705-17, August.
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