Corridor Stability of the Neoclassical Steady State

Akitaka Dohtani, Toshio Inaba and Hiroshi Osaka
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Akitaka Dohtani: University of Toyama
Toshio Inaba: Waseda University
Hiroshi Osaka: University of Toyama

Chapter 7. in Time and Space in Economics, 2007, pp 129-143 from Springer

Abstract: Summary Combining the permanent income hypothesis with the capital accumulation equation, we construct a growth model which gives a modified version of the neoclassical growth model. The consumption at one time is determined by the expected permanent income at that time. The modified growth model possesses a unique steady state which is the same as that of the neoclassical growth model. Unlike the neoclassical growth model, however, the modified growth model yields corridor stability. That is, there exists a corridor of stability around the steady state such that any path inside the corridor converges to the steady state and any path outside the corridor diverges. Thus, the neoclassical view of economy holds true for inside the corridor, but does not hold for outside the corridor, and hysteresis emerges near the corridor. Although the modified growth model generates fluctuating dynamics, it does explain the stably observed feature that any path which maintains a nearly proportional relation between consumption and income is compatible with fluctuating dynamics. We also make clear the effects of the parameters on the aggregate and the stability of the per-capita steady state.

Keywords: Solow-Swan growth model; Permanent income; Neoclassical steady state; Corridor stability; Hopf bifurcation (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1007/978-4-431-45978-1_7

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