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Endogenous business cycles and dynamic inefficiency
Author(s) -
Cazzavillan Guido,
Pintus Patrick A.
Publication year - 2006
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2006.0036.x
Subject(s) - inefficiency , indeterminacy (philosophy) , economics , hopf bifurcation , consumption (sociology) , mathematical economics , microeconomics , capital (architecture) , steady state (chemistry) , bifurcation , nonlinear system , social science , chemistry , physics , archaeology , quantum mechanics , sociology , history
This paper explores how the occurrence of local indeterminacy and endogenous business cycles relates to dynamic inefficiency, as defined by Malinvaud (1953), Phelps (1965) and Cass (1972). We follow Reichlin (1986) and Grandmont (1993) by considering a two‐period overlapping generations model of capital accumulation with labor–leisure choice into the first‐period of an agent's life and consumption in both periods. We first show that local indeterminacy and Hopf bifurcation are necessarily associated with a capital–labor ratio that is, at steady state, larger than the Golden Rule level. Consequently, paths converging asymptotically towards the steady state are shown to be dynamically inefficient, as there always exists another trajectory that starts with the same initial conditions and produces more aggregate consumption at all future dates. More surprising, however, is our main result showing that stable orbits, generated around a dynamically inefficient steady state through a supercritical Hopf bifurcation, may, in contrast, be dynamically efficient.