IDEAS home Printed from https://ideas.repec.org/p/ven/wpaper/2006_37.html
   My bibliography  Save this paper

Endogenous Business Cycles and Dynamic Inefficiency

Author

Listed:
  • Guido Cazzavillan

    (Department of Economics, University Of Venice Ca� Foscari)

  • Patrick Pintus

    (Universit� de la M�diterran�e and GREQAM-IDEP, France)

Abstract

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 OLG model of capital accumulation with labor-leisure choice into the first-period of agents� 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.

Suggested Citation

  • Guido Cazzavillan & Patrick Pintus, 2006. "Endogenous Business Cycles and Dynamic Inefficiency," Working Papers 2006_37, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2006_37
    as

    Download full text from publisher

    File URL: http://www.unive.it/pag/fileadmin/user_upload/dipartimenti/economia/doc/Pubblicazioni_scientifiche/working_papers/2006/WP_DSE_Cazzavillan_Pintus_37_06.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
    2. de Vilder, Robin, 1996. "Complicated Endogenous Business Cycles under Gross Substitutability," Journal of Economic Theory, Elsevier, vol. 71(2), pages 416-442, November.
    3. J. D. Geanakoplos & H. M. Polemarchakis, 1986. "Walrasian Indeterminacy and Keynesian Macroeconomics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(5), pages 755-779.
    4. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2007. "Indeterminacy in dynamic models: When Diamond meets Ramsey," Journal of Economic Theory, Elsevier, vol. 134(1), pages 513-536, May.
    5. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
    6. Benhabib, Jess & Laroque, Guy, 1988. "On competitive cycles in productive economies," Journal of Economic Theory, Elsevier, vol. 45(1), pages 145-170, June.
    7. Chattopadhyay, Subir & Gottardi, Piero, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Journal of Economic Theory, Elsevier, vol. 89(1), pages 21-67, November.
    8. Samuelson, Larry, 1980. "The Golden Rule with Endogenous Labor Participation Rate," American Economic Review, American Economic Association, vol. 70(4), pages 752-755, September.
    9. Tito Pietra, 2004. "Sunspots, indeterminacy and Pareto inefficiency in economies with incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(3), pages 687-699, October.
    10. C. Nourry & A. Venditti, 2006. "Overlapping Generations Model with Endogenous Labor Supply: General Formulation," Journal of Optimization Theory and Applications, Springer, vol. 128(2), pages 355-377, February.
    11. Cazzavillan, Guido & Pintus, Patrick A., 2006. "Capital externalities in OLG economies," Journal of Economic Dynamics and Control, Elsevier, vol. 30(7), pages 1215-1231, July.
    12. Benveniste, Lawrence M., 1976. "A complete characterization of efficiency for a general capital accumulation model," Journal of Economic Theory, Elsevier, vol. 12(2), pages 325-337, April.
    13. Luigi Montrucchio, 2004. "Cass transversality condition and sequential asset bubbles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(3), pages 645-663, October.
    14. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
    15. Cazzavillan, Guido, 2001. "Indeterminacy and Endogenous Fluctuations with Arbitrarily Small Externalities," Journal of Economic Theory, Elsevier, vol. 101(1), pages 133-157, November.
    16. Guido Cazzavillan & Patrick A. Pintus, 2004. "Robustness of Multiple Equilibria in OLG Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 456-475, April.
    17. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May.
    18. David Cass & Menahem E. Yaari, 1966. "A Re-examination of the Pure Consumption Loans Model," Journal of Political Economy, University of Chicago Press, vol. 74(4), pages 353-353.
    19. d ASPREMONT, Claude, & DOS SANTOS FERREIRA , Rodolphe & GERARD-VARET , Louis-André, 1994. "Market Power, Coordination Failures and Endogenous Fluctuations," LIDAM Discussion Papers CORE 1994068, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hartwig, Johannes, 2022. "Semi-endogenous growth dynamics in a macroeconomic model with delays," Structural Change and Economic Dynamics, Elsevier, vol. 62(C), pages 538-551.
    2. Drugeon, Jean-Pierre & Nourry, Carine & Venditti, Alain, 2010. "On efficiency and local uniqueness in two-sector OLG economies," Mathematical Social Sciences, Elsevier, vol. 59(1), pages 120-144, January.
    3. Nourry, Carine & Venditti, Alain, 2011. "Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy," Journal of Mathematical Economics, Elsevier, vol. 47(2), pages 164-169, March.
    4. Cazzavillan, Guido & Pintus, Patrick, 2007. "Dynamic inefficiency in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 137(1), pages 754-759, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gori, Luca & Sodini, Mauro, 2020. "Endogenous labour supply, endogenous lifetime and economic development," Structural Change and Economic Dynamics, Elsevier, vol. 52(C), pages 238-259.
    2. Bosi, Stefano & Seegmuller, Thomas, 2008. "Can heterogeneous preferences stabilize endogenous fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 624-647, February.
    3. Luca Gori & Mauro Sodini, 2014. "Indeterminacy and nonlinear dynamics in an OLG growth model with endogenous labour supply and inherited tastes," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(1), pages 159-179, April.
    4. Luca Gori & Mauro Sodini, 2011. "Nonlinear Dynamics in an OLG Growth Model with Young and Old Age Labour Supply: The Role of Public Health Expenditure," Computational Economics, Springer;Society for Computational Economics, vol. 38(3), pages 261-275, October.
    5. Hippolyte D'Albis & Emmanuelle Augeraud-Veron, 2008. "Endogenous Retirement and Monetary Cycles," Mathematical Population Studies, Taylor & Francis Journals, vol. 15(4), pages 214-229.
    6. Cazzavillan, Guido & Lloyd-Braga, Teresa & Pintus, Patrick A., 1998. "Multiple Steady States and Endogenous Fluctuations with Increasing Returns to Scale in Production," Journal of Economic Theory, Elsevier, vol. 80(1), pages 60-107, May.
    7. Potrafke, Niklas, 2010. "The growth of public health expenditures in OECD countries: Do government ideology and electoral motives matter?," Journal of Health Economics, Elsevier, vol. 29(6), pages 797-810, December.
    8. Thomas Seegmuller, 2009. "Capital–Labour Substitution And Endogenous Fluctuations: A Monopolistic Competition Approach With Variable Markup," The Japanese Economic Review, Japanese Economic Association, vol. 60(3), pages 301-319, September.
    9. Seegmuller, Thomas, 2008. "Taste For Variety And Endogenous Fluctuations In A Monopolistic Competition Model," Macroeconomic Dynamics, Cambridge University Press, vol. 12(4), pages 561-577, September.
    10. Philippe Weil, 2008. "Overlapping Generations: The First Jubilee," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 115-134, Fall.
    11. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2007. "Indeterminacy in dynamic models: When Diamond meets Ramsey," Journal of Economic Theory, Elsevier, vol. 134(1), pages 513-536, May.
    12. Anna Agliari & George Vachadze, 2011. "Homoclinic and Heteroclinic Bifurcations in an Overlapping Generations Model with Credit Market Imperfection," Computational Economics, Springer;Society for Computational Economics, vol. 38(3), pages 241-260, October.
    13. Chen, Yan & Zhang, Yan, 2010. "Externalities, income taxes and indeterminacy in OLG models," MPRA Paper 22370, University Library of Munich, Germany.
    14. Zhang, Yan & Chen, Yan, 2009. "Endogenous income taxes in OLG economies," MPRA Paper 16412, University Library of Munich, Germany.
    15. Carli, Francesco & Lloyd-Braga, Teresa & Modesto, Leonor, 2024. "Imperfect competition in the banking sector and economic instability," Journal of Mathematical Economics, Elsevier, vol. 112(C).
    16. Cazzavillan, Guido & Pintus, Patrick A., 2005. "On competitive cycles and sunspots in productive economies with a positive money stock," Research in Economics, Elsevier, vol. 59(2), pages 137-147, June.
    17. Modesto, Leonor & Lloyd-Braga, Teresa & Coimbra, Rui, 2002. "Endogenous Growth Fluctuations in Unionised Economy with Productive Externalities," CEPR Discussion Papers 3230, C.E.P.R. Discussion Papers.
    18. Hashimoto, Ken-ichi & Im, Ryonghun & Kunieda, Takuma & Shibata, Akihisa, 2022. "Financial destabilization," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    19. C. Nourry & A. Venditti, 2006. "Overlapping Generations Model with Endogenous Labor Supply: General Formulation," Journal of Optimization Theory and Applications, Springer, vol. 128(2), pages 355-377, February.
    20. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May.

    More about this item

    Keywords

    Overlapping generations; endogenous labor supply; multiple equilibria; endogenous fluctuations; dynamic inefficiency;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ven:wpaper:2006_37. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Geraldine Ludbrook (email available below). General contact details of provider: https://edirc.repec.org/data/dsvenit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.