General Constrained Dynamic (GCD) models with intertemporal utility functions

Erhard Glötzl

MPRA Paper from University Library of Munich, Germany

Abstract: In economics balance identities as e.g. C+K'-Y(L,K)=0 must always apply. Therefore, they are called constraints. This means that variables C,K,L cannot change independently of each other. In general equilibrium theory (GE) the solution for the equilibrium is obtained as an optimisation under the above or similar constraints. The standard method for modelling dynamics in macroeconomics are Dynamic Stochastic General Equilibrium (DSGE) models. Dynamics in DSGE models result from the maximisation of an intertemporal utility function that results in the Euler-Lagrange equations. The Euler-Lagrange equations are differential equations that determine the dynamics of the system. In Glötzl, Glötzl, und Richters (2019) we have introduced an alternative method to model dynamics, which constitutes a natural extension of GE theory. This approach is based on the standard method for modelling dynamics under constraints in physics. We therefore call models of this type "General Constrained Dynamic (GCD)" models. In Glötzl (2022b) this modelling method is described for non-intertemporal utility functions in macroeconomics. Since intertemporal utility functions are, however, essential for many economic models, this paper sets out to extend the GCD modelling framework to intertemporal GCD models, referred to as IGCD models in the following. This paper sets out to define the principles of formulating IGCD models and show how IGCD can be understood as a generalisation and alternative to DSGE models.

Keywords: macroeconomic models; intertemporal utility function; constraint dynamics; GCD; DSGE; out-of-equilibrium dynamics; Lagrangian mechanics; stock flow consistent; SFC (search for similar items in EconPapers)
JEL-codes: A12 B13 B41 B59 C02 C30 C54 C60 E10 (search for similar items in EconPapers)
Date: 2022-03-15
New Economics Papers: this item is included in nep-mac, nep-ore and nep-upt
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