Poverty Traps and Business Cycles in a Stochastic Overlapping Generations Economy with S-shaped Law of Motion
Klaus Reiner Schenk-Hoppé
University of Leeds - Leeds University Business School; University of Leeds - School of Mathematics; Norwegian School of Economics (NHH) - Department of Finance
October 25, 2002
U of Copenhagen, Economics Discussion Paper No. 02-13
This paper contributes to the understanding of stochastic economic dynamics with S-shaped law of motion. Applying random dynamical systems theory, we obtain a complete analysis of a stochastic OLG growth model. In the long-run the economy converges either to a state with no capital (poverty trap) or a sample path of a random fixed point (business cycle). The threshold capital stock separating both regimes is a random variable that depends on the future realization of the shocks; this critical level cannot be identified using past observations. Supply of outside capital therefore has an uncertain effect. Policy recommendations are given which cannot be obtained employing Markov equilibria. A numerical illustration is provided.
Number of Pages in PDF File: 16
Keywords: S-shaped stochastic law of motion, random dynamical systems, poverty traps, business cycles, production shocks
JEL Classification: E32, C62, D91working papers series
Date posted: December 3, 2002
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