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de Mendonça, Pedro
Year of Publication: 
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EERI Research Paper Series 05/2013
We discuss the implications of nonlinear dynamic phenomena for policy definition in a growing economy. De- parting from the hypothesis that local analysis of economic systems focus the definition of policy on short run outcomes, we propose that to have a clearer perspective on long run outcomes, we have to focus the analysis on the study of local bifurcations and global dynamics instead. This approach, in our opinion, provides a better insight on complex macroeconomic phenomena and allows for a better definition of policy rules in a long run horizon. To demonstrate this hypothesis, we set up a representative agent economy based on neoclassical assumptions, where agents face convex risk premium and investment adjustment costs. This economy describes an endogenous opti- mal growth model, that has solutions given by a nonlinear three-dimensional dynamical system. To evaluate this system, we resort to qualitative analysis methods and show the existence of fold (saddle-node), hopf and fold-hopf bifurcations, in a multiple equilibria environment. Numerical results suggest the absence of local stable solutions for a wide range of parameter values. We then focus our analysis on the complex organization of the economy phase-space and evaluate several conjectures related to the existence of complex nonlinear phenomena in the vicinity of fold-hopf bifurcation points. We relate these conjectures with the hypothesis of endogenous structural change and discuss the implications of complex global dynamic phenomena for long run policy definition.
Nonlinear Growth Dynamics
Financial Instability
Fold-Hopf Bifurcation
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Working Paper
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