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Poverty Traps and Business Cycles in a Stochastic Overlapping Generations Economy with S-shaped Law of Motion

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  • Klaus Reiner Schenk-Hoppé

    (University of Copenhagen Institute of Economics)

Abstract

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.

Suggested Citation

  • Klaus Reiner Schenk-Hoppé, 2002. "Poverty Traps and Business Cycles in a Stochastic Overlapping Generations Economy with S-shaped Law of Motion," Discussion Papers 02-13, University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:kuiedp:0213
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    References listed on IDEAS

    as
    1. Schenk-Hoppe, Klaus Reiner & Schmalfu[ss], Bjorn, 2001. "Random fixed points in a stochastic Solow growth model," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 19-30, September.
    2. 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.
    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 731-744, August.
    4. Costas Azariadis & Allan Drazen, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 105(2), pages 501-526.
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    Cited by:

    1. Nishimura, Kazuo & Rudnicki, Ryszard & Stachurski, John, 2006. "Stochastic optimal growth with nonconvexities," Journal of Mathematical Economics, Elsevier, vol. 42(1), pages 74-96, February.
    2. Kazuo Nishimura & Ryszard Rudnicki & John Stachurski, 2004. "Stochastic Growth With Nonconvexities:The Optimal Case," Department of Economics - Working Papers Series 897, The University of Melbourne.
    3. Elliott, Robert J. & Chen, Zhiping & Duan, Qihong, 2009. "Insurance claims modulated by a hidden Brownian marked point process," Insurance: Mathematics and Economics, Elsevier, vol. 45(2), pages 163-172, October.

    More about this item

    Keywords

    S-shaped stochastic law of motion; random dynamical systems; poverty traps; business cycles; production shocks;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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