Business cycles, bifurcations and chaos in a neo-classical model with investment dynamics

Abstract

This paper is motivated by the rising interest in assessing the effect of disruptions in resources and environmental conditions on economic growth. Such an assessment requires, ultimately, the use of truly integrated models of the climate and economic systems. For these purposes, we have developed a Non-Equilibrium Dynamic Model (NEDyM) by introducing investment dynamics and nonequilibrium effects into a Solow growth model. NEDyM can reproduce various economic regimes, such as manager-or shareholder-driven economies, and permits one to examine the effects of disruptions on the economy, given either an assumption of steady-state growth or an assumption of business cycles with transient disequilibrium. We have applied NEDyM to an idealized economy that resembles in certain respects the 15-state European Union in 2001.The key parameter in NEDyM is investment flexibility. For certain values of this parameter, the model reproduces classical business cycles with realistic characteristics; in particular, NEDyM captures the cycles' asymmetry, with a longer growth phase and more rapid contraction. The cyclical behavior is due to the investmentprofit instability and is constrained by the increase in labor costs and the inertia of production capacity. For somewhat greater investment flexibility, the model exhibits chaotic behavior, because a new constraint intervenes, namely limited investment capacity. The preliminary results presented here show that complex behavior in the economic system may be due entirely, or at least largely, to deterministic, intrinsic factors, even if the economic long-term equilibrium is neo-classical in nature. In the chaotic regime, moreover, slight shocks -such as those due to natural or man-made catastrophes -may lead to significant changes in the economic system.

The resilience of the Indian economy to rising oil prices as a validation test for a global energy–environment–economy CGE model

“…We may thus conclude on another prospect for future research. It is necessary to investigate how short-term mechanisms might influence long-term growth pathways (see an attempt to do so in Hallegatte et al, 2008) or, in other words, if there is a path-dependency of long-run growth. If this influence is non-negligible, indeed, the analysis of short-run mechanisms will have an undeniable place in the understanding of long-run macroeconomy, and modeling teams will have to devote more time to the apprehension of the links between short-term dynamics and long-term trajectories.…”

On the Concept of Endogenous Volatility

“…In Hallegatte et al (2008), a growth model under the absence of market clearing is explored; the authors call it non-equilibrium dynamic model (NEDyM). The NEDyM might generate endogenous business cycles under peculiar conditions.…”

The national bioenergy investment model: Technical documentation

“…Once a biofuel producing facility has been established, its maximum capacity is limited either by the availability of capital [K] (Quandt 1988, Ferguson 1998, Hallegatte et al 2008 . (48b) rt share × international price + (1 -export share) × domestic price.…”