Time, bifurcations and economic applications
In this paper, we apply first and higher-order Euler discretizations to compare dynamic systems in discrete and continuous time. In addition, we stress the difference between backward and forward-looking approximations. Focussing on local bifurcations, we find that time representation is neutral and asymptotically neutral for models with saddle-node and Hopf bifurcations, respectively. Conversely, it is far from neutral for models with flip bifurcations (in discrete time), even though these bifurcations disappear under a critical discretization step or under higher-order Euler discretizations. In the second part, we apply the theory to popular economic models. Discrete-time dynamics of capital accumulation, such as Solow (1956), can be recovered under first-roder backward-looking discretizations because of the predetermined nature of capital. Models of capital accumulation with intertemporal optimization, such as Ramsey (1928), need hybrid discretizations because of the forward-looking nature of the Euler equation, where consumption behaves as jumping variable.
|Date of creation:||Apr 2009|
|Date of revision:|
|Note:||View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00384513|
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