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Endogenous Business Cycles and Dynamic Inefficiency

Guido Cazzavillan and Patrick Pintus

No 2006_37, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: This paper explores how the occurrence of local indeterminacy and endogenous business cycles relates to dynamic inefficiency, as defined by Malinvaud (1953), Phelps (1965) and Cass (1972). We follow Reichlin (1986) and Grandmont (1993) by considering a two-period OLG model of capital accumulation with labor-leisure choice into the first-period of agents� life and consumption in both periods. We first show that local indeterminacy and Hopf bifurcation are necessarily associated with a capital-labor ratio that is, at steady state, larger than the Golden Rule level. Consequently, paths converging asymptotically towards the steady state are shown to be dynamically inefficient, as there always exists another trajectory that starts with the same initial conditions and produces more aggregate consumption at all future dates. More surprising, however, is our main result showing that stable orbits, generated around a dynamically inefficient steady state through a supercritical Hopf bifurcation, may, in contrast, be dynamically efficient.

Keywords: Overlapping generations; endogenous labor supply; multiple equilibria; endogenous fluctuations; dynamic inefficiency (search for similar items in EconPapers)
JEL-codes: C62 D61 E32 (search for similar items in EconPapers)
Pages: 32 pagine
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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