2013, 3(1): 63-76. doi: 10.3934/naco.2013.3.63

Instability and growth due to adjustment costs

1. 

University of Vienna, Brünnerstr. 72, 1210 Vienna, Austria, Austria

Received  September 2011 Revised  November 2012 Published  January 2013

This paper provides a new and surprising reason for growth, namely costs. More precisely, adding adjustment costs of the control to a one-dimensional, strictly concave optimal control problem does not affect the steady state(s). Then, sufficiently high adjustment costs turn an interior and saddle-point stable steady state of the original, one-state variable model into a source that can lead to unbounded growth. Given a version of the open economy Ramsey model, the initial conditions determine whether unbounded growth or impoverishment results. Related to this threshold property, the strict concave two-state variable control model allows for thresholds even if it has a unique and stable steady state.
Citation: Franz Wirl, Andreas J. Novak. Instability and growth due to adjustment costs. Numerical Algebra, Control and Optimization, 2013, 3 (1) : 63-76. doi: 10.3934/naco.2013.3.63
References:
[1]

R. J. Barro and X. Sala-i-Martin, "Economic Growth," Mc Graw Hill, 1995.

[2]

J. Benhabib and K. Nishimura, The Hopf bifurcation and the existence and stability of closed orbits in multi-sector models of economic growth, Journal of Economic Theory, 21 (1979), 421-444. doi: 10.1016/0022-0531(79)90050-4.

[3]

E. Dockner, Local stability analysis in optimal control problems with two state variables, in "Optimal Control Theory and Economic Analysis" (ed. G. Feichtinger), Amsterdam, North Holland, 2 (1985), 89-103.

[4]

R. A. Easterlin, Income and happiness: towards a unified theory, Economic Journal, 111 (2001), 465-484. doi: 10.1111/1468-0297.00646.

[5]

G. Feichtinger, A.J. Novak and F. Wirl, Limit cycles in intertemporal adjustment models - theory and applications, Journal of Economic Dynamics and Control, 18 (1994), 353-380. doi: 10.1016/0165-1889(94)90013-2.

[6]

J. Guckenheimer and P. Holmes, "Nonlinear Oscillations, Dynamical Systems, and Bifurcation of Vector Fields," (second printing), Springer Verlag, New York, 1986.

[7]

F. X. Hof and F. Wirl, Wealth induced multiple equilibria in small open economy versions of the Ramsey model, Homo Oeconomicus, 25 (2008), 1-22.

[8]

A. Khibnik, I. Yu, A. Kuznetsov, V. V. Levitin and E. V. Nikolaev, "Interactive Local Bifurcation Analyzer, Manual," Amsterdam, CAN, 1992.

[9]

M. Kurz, Optimal economic growth and wealth effects, International Economic Review, 9 (1968), 348-357. doi: 10.2307/2556231.

[10]

R. E. Lucas Jr., On the mechanics of economic development, Journal of Monetary Economics, 22 (1988), 3-42. doi: 10.1016/0304-3932(88)90168-7.

[11]

S. Rebelo, Long run policy analysis and long-run growth, Journal of Political Economy, 99 (1991), 500-521. doi: 10.1086/261764.

[12]

P. Romer, Increasing returns and long-run growth, Journal of Political Economy, 94 (1986), 1002-1037. doi: 10.1086/261420.

[13]

P. Romer, Endogenous technical change, Journal of Political Economy, 98 (1990), 71-101. doi: 10.1086/261725.

[14]

F. Wirl and G. Feichtinger, History dependence in concave economies, Journal of Economic Behavior and Organization, 57 (2005), 390-407. doi: 10.1016/j.jebo.2005.04.009.

[15]

F. Wirl, A. J. Novak and F. X. Hof, Happiness due to consumption and its increases, wealth and status, Studies in Nonlinear Dynamics and Econometrics, 12 (2008).

show all references

References:
[1]

R. J. Barro and X. Sala-i-Martin, "Economic Growth," Mc Graw Hill, 1995.

[2]

J. Benhabib and K. Nishimura, The Hopf bifurcation and the existence and stability of closed orbits in multi-sector models of economic growth, Journal of Economic Theory, 21 (1979), 421-444. doi: 10.1016/0022-0531(79)90050-4.

[3]

E. Dockner, Local stability analysis in optimal control problems with two state variables, in "Optimal Control Theory and Economic Analysis" (ed. G. Feichtinger), Amsterdam, North Holland, 2 (1985), 89-103.

[4]

R. A. Easterlin, Income and happiness: towards a unified theory, Economic Journal, 111 (2001), 465-484. doi: 10.1111/1468-0297.00646.

[5]

G. Feichtinger, A.J. Novak and F. Wirl, Limit cycles in intertemporal adjustment models - theory and applications, Journal of Economic Dynamics and Control, 18 (1994), 353-380. doi: 10.1016/0165-1889(94)90013-2.

[6]

J. Guckenheimer and P. Holmes, "Nonlinear Oscillations, Dynamical Systems, and Bifurcation of Vector Fields," (second printing), Springer Verlag, New York, 1986.

[7]

F. X. Hof and F. Wirl, Wealth induced multiple equilibria in small open economy versions of the Ramsey model, Homo Oeconomicus, 25 (2008), 1-22.

[8]

A. Khibnik, I. Yu, A. Kuznetsov, V. V. Levitin and E. V. Nikolaev, "Interactive Local Bifurcation Analyzer, Manual," Amsterdam, CAN, 1992.

[9]

M. Kurz, Optimal economic growth and wealth effects, International Economic Review, 9 (1968), 348-357. doi: 10.2307/2556231.

[10]

R. E. Lucas Jr., On the mechanics of economic development, Journal of Monetary Economics, 22 (1988), 3-42. doi: 10.1016/0304-3932(88)90168-7.

[11]

S. Rebelo, Long run policy analysis and long-run growth, Journal of Political Economy, 99 (1991), 500-521. doi: 10.1086/261764.

[12]

P. Romer, Increasing returns and long-run growth, Journal of Political Economy, 94 (1986), 1002-1037. doi: 10.1086/261420.

[13]

P. Romer, Endogenous technical change, Journal of Political Economy, 98 (1990), 71-101. doi: 10.1086/261725.

[14]

F. Wirl and G. Feichtinger, History dependence in concave economies, Journal of Economic Behavior and Organization, 57 (2005), 390-407. doi: 10.1016/j.jebo.2005.04.009.

[15]

F. Wirl, A. J. Novak and F. X. Hof, Happiness due to consumption and its increases, wealth and status, Studies in Nonlinear Dynamics and Econometrics, 12 (2008).

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