Distribution of Demand Behavior and the Golden Rule Stationary State

Isabelle Maret
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Isabelle Maret: Bureau d’Economie Théorique et Apliquée, Strasbourg, France

No 1995065, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper develops an example where persistent deterministic business cycles with perfect foresight cannot emerge when introducing restrictions on the distribution of demand behavior. The distributional assumptions require that demand functions are very different in between households such the households react heterogeneously to changes in the real expected interest rate and the expected real income. Individual rationality plays a minor role. These distributional requirement sguarantee, furthermore, that the unique stationary temporary equilibrium, referred in the literature by the golden rule stationary state, is globally unstable. When households do no longer have perfect foresight but revise their expectation following a fixed process, the stability property of the stationary state might be reversed. This well known result has been obtained in the literature of business cycles by restricting household expectation functions. By opposite, this result is obtained, here, for arbitrary household expectation rules. The restriction is imposed on the support of the distribution. It is required that household expectation functions are different among households in the sense that household react heterogeneously to current and past price changes.

Keywords: distribution of household characteristics; Expectation Rule (search for similar items in EconPapers)
Date: 1995-11-01
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