Scribd
Upload
136 views13 pages

EC744 Lecture Notes: Economic Dynamics: Prof. Jianjun Miao

This document provides an overview of economic dynamics and concepts such as deterministic dynamic systems, state vectors, state transition functions, difference equations, linear and autonomous systems, stability of fixed points, periodic orbits, scalar linear equations, homogeneous equations, autonomous and non-autonomous equations, stability, stock market bubbles under adaptive expectations and perfect foresight, and the impact of anticipated and unanticipated dividend tax changes. The summary focuses on key mathematical concepts and models used to analyze economic dynamics.

Uploaded by

binicle
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
136 views13 pages

EC744 Lecture Notes: Economic Dynamics: Prof. Jianjun Miao

This document provides an overview of economic dynamics and concepts such as deterministic dynamic systems, state vectors, state transition functions, difference equations, linear and autonomous systems, stability of fixed points, periodic orbits, scalar linear equations, homogeneous equations, autonomous and non-autonomous equations, stability, stock market bubbles under adaptive expectations and perfect foresight, and the impact of anticipated and unanticipated dividend tax changes. The summary focuses on key mathematical concepts and models used to analyze economic dynamics.

Uploaded by

binicle
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 13

EC744 Lecture Notes:

Economic Dynamics
Prof. Jianjun Miao
1 Deterministic Dynamic System
State vector a
t
R
a
State transition function a
t
= j
_
a
0
, t; c
_
, a
0
= a
0
, parameter c R
j
A parametrized dynamic system: (A, j) where A R
a
and j : AR
R
j
A
Dierence equation
1 (t; a
t
, a
t+1
, ..., a
t+n
; c) = 0
Or
a
t+n
= ) (t; a
t
, a
t+1
, ..., a
t+n1
; c)
The solution a
t
is an orbit or trajectory
Linear if ) is linear. Order n
Focus on rst-order system. Why?
a
t+1
= ) (t, a
t
; c)
Autonomous system if ) does not depend on t.
The impact of t typically comes from an exogenous forcing term:
1
t
= (1 c) 1
t1
+ 1
t
If initial value is known a
0
, it is easy to obtain a solution. Boundary value
problem
General solution, particular solution
Vector eld o
a
t
= a
t+1
a
t
= ) (t, a
t
; c) a
t
= o (t, a
t
; c)
Steady state of an autonomous system
a
t+1
= ) (a
t
)
if the xed point a such that
a = ) ( a)
(Liapunov Stability) The state a is a stable xed point of the map ) if for
any c 0, there exists some c (0, c) such that
|a
c
a| < c == |a
t
a| < c
for all t c.
(Asymptotic stability) The state a is asymptotically stable if it is stable and
the constant in the last denition can be chosen so that, if |a
c
a| < c
for any c, then |a
t
a| 0 as t o.
Basin of attraction, globally asymptotically stable (Figures)
Periodic orbits
2 Scalar Linear Equations
First-order dierence equation:
a
t
= oa
t1
+ b
t
.
Superposition principle:
a
j
t
= a
c
t
+ a
j
t
where the complementary function a
c
t
is the general solution to the correspond-
ing homogeneous equation a
t
= oa
t1
and a
j
t
is a particular solution.
2.1 Homogeneous equation
a
t
= oa
t1
Phase diagram
Four cases (table): monotonic convergence, damped oscillation, monotone
divergence, explosive oscillation
General solution
a
t
= co
t
Particular solution
a
t
= a
c
o
tc
2.2 Autonomous equations
a
t
= oa
t1
+ b
By the superposition principle,
a
j
t
= co
t
+ a
j
t
.
A natural candidate for the particular solution is the steady state
a =
b
1 o
for o ,= 1.
So
a
j
t
= co
t
+ a.
Boundary value problem
a
t
= a + (a
c
a) o
tc
The solution is asymptotically stable if [o[ < 1.
2.3 Non-autonomous equations
a
t
= oa
t1
+ b
t
.
By the superposition principle,
a
j
t
= co
t
+ a
j
t
.
Backward-Looking Solution. Repeated substitution
a
t
= o
a
a
ta
+
a1

i=0
o
i
b
ti
Let a = 0 if a
0
is given
Let a o if there is no initial condition
Assume [o[ < 1 and [b
t
[ < 1
a
j
t
= co
t
+
o

i=0
o
i
b
ti
Forward-Looking Solution. Repeated substitution
a
t
=
_
1
o
_
a
a
t+a

1
o
a1

)=0
_
1
o
_
)
b
t+1+)
.
Let a o and assume [b
t
[ < 1. We must have [o[ 1.
a
j
t
= co
t

1
o
o

)=0
_
1
o
_
)
b
t+1+)
Stability
3 Stock Market Bubbles
3.1 Price Dynamics with Adaptive Expectations
(1 + v) j
t
= o
t
+ j
c
t+1
Adaptive expectations
j
c
t+1
= Aj
t
+ (1 A) j
c
t
.
Eliminating j
c
t+1
, we have
j
t+1
= oj
t
+ b
t
where
1 = 1 + v, o =
1(1 A)
1 A
,
b
t1
=
o
t
(1 A) o
t1
1 A
Backward solution
j
t
= o
t
j
0
. .
Bubble
+ j
+
t
..
Fundamental
where
j
+
t
=
A
1 A
t1

i=0
o
i
o
ti
.
Suppose o
t
= o 0 for all t. Then
j
+
t
=
_
1 o
t
_
o
v
The limit is j
+
= ov. We have
j
t
j
+
= o
t
(j
0
j
+
)
What is wrong with adaptive expectations?
Eliminating j
t
, we have
j
c
t+1
= oj
c
t
+
Ao
1 A
So
j
c
t
j
+
= o
t
(j
c
0
j
+
) .
We now have
j
t
j
c
t
= o
t
(j
0
j
c
0
)
So mistake is systematic!
3.2 Price Dynamics with Perfect Foresight
Assume
j
c
t+1
= j
t+1
.
We have
j
t+1
= 1j
t
o
Solution is
j
t
= j
+
+ c1
t
= j
+
+ (j
0
j
+
) 1
t
.
Kill bubble: c = 0!
3.3 Dividend Taxes
j
t+1
= 1j
t
(1 t) o
General solution
j
t
(t) = j
+
(t) + c1
t
= j
+
(t) + (j
0
j
+
(t)) 1
t
where
j
+
(t) =
(1 t) o
v
.
Unanticipated tax increase from t
0
to t
1
. The price immediately drops
to j
+
(t
1
) and remains this value forever.
j
+
(t
1
) =
(1 t
1
) o
v
<
(1 t
0
) o
v
= j
+
(t
0
)
Anticipated tax increase at date T. For t T, the stock price is j
t
=
j
+
(t
1
) .
For t < T, the tax rate is t
0
and the solution is
j
t
(t
0
) = j
+
(t
0
) + c1
t
= j
+
(t
0
) + (j
0
j
+
(t
0
)) 1
t
.
At time T, we must have j
T
(t
0
) = j
+
(t
1
) . So
j
+
(t
1
) = j
+
(t
0
) + (j
0
j
+
(t
0
)) 1
T
.
Solving yields
j
0
= j
+
(t
0
)
1
1
t
(j
+
(t
0
) j
+
(t
1
)) .

You might also like