Business Cycles, Bifurcations and Chaos in a Neo-Classical Model with Investment Dynamics

Stephane Hallegatte, Michael Ghil, Patrice Dumas () and Jean Charles Hourcade ()
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Michael Ghil: ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres, AOS - Department of Atmospheric and Oceanic Sciences [Los Angeles] - UCLA - University of California [Los Angeles] - UC - University of California, IGPP - Institute of Geophysics and Planetary Physics [Los Angeles] - UCLA - University of California [Los Angeles] - UC - University of California
Patrice Dumas: CIRED - centre international de recherche sur l'environnement et le développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique
Jean Charles Hourcade: CIRED - centre international de recherche sur l'environnement et le développement - Cirad - Centre de Coopération Internationale en Recherche Agronomique pour le Développement - EHESS - École des hautes études en sciences sociales - AgroParisTech - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique

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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 investment­ profit 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.

Keywords: Macroeconomic dynamics; Nonequilibrium modeling; Business cycles; Investment flexibility (search for similar items in EconPapers)
Date: 2008
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00007196v1
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Published in Journal of Economic Behavior and Organization, 2008, 67 (1), pp.57-77. ⟨10.1016/j.jebo.2007.05.001⟩

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Journal Article: Business cycles, bifurcations and chaos in a neo-classical model with investment dynamics (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00007196

DOI: 10.1016/j.jebo.2007.05.001

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