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Self‐fulfilling patience

Liutang Gong () and Wei Wang

Australian Economic Papers, 2020, vol. 59, issue 4, 336-357

Abstract: This paper explores macroeconomic implications of investment in patience in a standard neoclassical growth model with Becker‐Mulligan endogenous time preferences. The endogenous discount rate acts as a new margin for inter‐temporal decisions, in addition to the standard margin that hinges on the marginal return of capital. This time preference margin alters the equilibrium dynamics and stability of the neoclassical growth model substantially. When the discount rate is positive, there may exist multiple steady states that are either saddle‐point stable or unstable. When the discount rate is negative, the unique steady state is locally indeterminate due to self‐fulfilling patience investment. Interestingly, the existence of the local indeterminacy does not need any externality. When the discount rate is zero, various types of bifurcations can happen, leading to rich equilibrium dynamics such as limit cycles and chaos. We show that opening up the closed economy can cause aggregate instability.

Date: 2020
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Handle: RePEc:bla:ausecp:v:59:y:2020:i:4:p:336-357