Stability analysis of Uzawa–Lucas endogenous growth model

This paper analyzes, within its feasible parameter space, the dynamics of the Uzawa–Lucas endogenous growth model. The model is solved from a centralized social planner perspective as well as in the model’s decentralized market economy form. We examine the stability properties of both versions of the model and locate Hopf and transcritical bifurcation boundaries. In an extended analysis, we investigate the existence of Andronov–Hopf bifurcation, branch point bifurcation, limit point cycle bifurcation, and period-doubling bifurcations. While these all are local bifurcations, the presence of global bifurcation is confirmed as well. We find evidence that the model could produce chaotic dynamics, but our analysis cannot confirm that conjecture. It is important to recognize that bifurcation boundaries do not necessarily separate stable from unstable solution domains. Bifurcation boundaries can separate one kind of unstable dynamics domain from another kind of unstable dynamics domain, or one kind of stable dynamics domain from another kind (called soft bifurcation), such as bifurcation from monotonic stability to damped periodic stability or from damped periodic to damped multi-periodic stability. While there are an infinite number of kinds of unstable dynamics, some very close to stability in appearance, there also are an infinite number of kinds of stable dynamics. Hence, subjective prior views on whether the economy is or is not stable provide little guidance without mathematical analysis of model dynamics. When a bifurcation boundary crosses the parameter estimates’ confidence region, robustness of dynamical inferences from policy simulations are compromised, when conducted in the usual manner only at the parameters’ point estimates.