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Lecture 9

Mausumi Das

Lecture Notes, DSE

August 14, 2014

Das (Lecture Notes, DSE) Macro August 14, 2014 1 / 18

First Order Linear Non-Autonmous Dierence Equation:

Solution & Stability

In last class we have seem that for a rst order non-autonomous

linear dierence equation of the form

x

t+1

= ax

t

+ b

t

can have two possible solutions:

A Backward Solution that assumes existence of a pre-determined

initial value;

A Forward Solution that assumes existence of a well-dened terminal

value.

The Backward Solution to the above equation is given by:

x

t

= Ca

t

+

t1

i =0

a

i

b

t1i

.

Das (Lecture Notes, DSE) Macro August 14, 2014 2 / 18

Backward Solution: Stability

We also know that the backward solution will be globally

asymptotically stable if

1

jaj < 1

2

jb

t

j 5 B for all t, where B is a nite constant.

We now turn to the derivation (and stability) of the corresponding

forward solution.

Das (Lecture Notes, DSE) Macro August 14, 2014 3 / 18

First Order Linear Non-Autonmous Dierence Equation:

Forward Solution

Consider the same non-autonomous dierence equation as before:

x

t+1

= ax

t

+ b

t

But instead of an initial condition, suppose we are given a terminal

condition specifying that

lim

t!

x

t

= x,

where x is a nite constant.

Since we have to use a terminal value, we could rewrite the dierence

equation to express the current value of the variable in terms of its

future value as follows:

x

t

=

1

a

x

t+1

1

a

b

t

Das (Lecture Notes, DSE) Macro August 14, 2014 4 / 18

Forward Solution: Existence & Stability

Now interating forward,

x

t

=

1

a

x

t+1

1

a

b

t

=

1

a

1

a

x

t+2

1

a

b

t+1

1

a

b

t

=

1

a

2

x

t+2

1

a

2

b

t+1

1

a

b

t

=

1

a

3

x

t+3

1

a

3

b

t+2

1

a

2

b

t+1

1

a

b

t

.............

=

1

a

n

x

t+n

1

a

n

i =0

1

a

i

b

t+i

.

Recall that the terminal value of x

t

is given by x.

Hence allowing n to go to (i.e., iterating innite times forward) and

replacing the corresponding x

t+n

by x, we get the particular solution

for the dierence equation that satisfy the given terminal condition.

Das (Lecture Notes, DSE) Macro August 14, 2014 5 / 18

Forward Solution: Existence & Stability (Contd.)

This particular solution is given by:

x

t

= lim

n!

1

a

n

x

1

a

i =0

1

a

i

b

t+i

.

Notice however that for solution would indeed be consistent with the

given terminal condition if and only if the RHS converges to a nite

value. A sucient condition for that is given by

1

jaj > 1

2

b

t

5 B for all t, where B is a nite constant.

Under these two conditions, the rst term in the RHS above vanishes,

while the last term converges to a nite value, say

B

t

.

Das (Lecture Notes, DSE) Macro August 14, 2014 6 / 18

Forward Solution: Existence & Stability (Contd.)

Thus under these conditions, the forward solution for x

t

is given by:

x

t

=

1

a

i =0

1

a

i

b

t+i

=

B

t

.

Notice that:

The forward solution is well-dened if the above conditions are

satised; a forward solution may not exist otherwise.

When the above sucient conditions are satised, the forward solution

is also stable and converges to its terminal value x. Otherwise, even if

it exists, it explodes to innity.

The terminal value x cannot be just any arbitrary constant. It has to

be the limit point of

B

t

(which in turn depends on the parameter a and

the sequence of the non-autonomous terms fb

t

g

t=0

).

Das (Lecture Notes, DSE) Macro August 14, 2014 7 / 18

System of Simultaneous Dierence Equations:

In our analysis so far we have focussed on a single variable and there

for a single equation of motion capturing the evolution of this variable.

It is concievable that in an economy there are several variables which

change over time simultaneously (e.g., capital stock and population)

such that to analyse the dynamic behaviour of the economy, we have

to look at the evolution of all these state variables together.

If there are N = 2 such state variables, then the dynamical system

will now be represented by N dierent equations of motions and we

have to analyse all these equations simultaneously.

In this course, we shall limit our analysis to a 2 2 autonomous

system, (i.e, 2 autonomous dierence equations in 2 state variables)

as described below:

x

t+1

= f (x

t

, y

t

; )

y

t+1

= g(x

t

, y

t

; )

Das (Lecture Notes, DSE) Macro August 14, 2014 8 / 18

2X2 System of Simultaneous Dierence Equations: Linear

& Autonomous

Consider the following two simultaneous dierence equations:

x

t+1

= a

11

x

t

+ a

12

y

t

+ b

1

y

t+1

= a

21

x

t

+ a

22

y

t

+ b

2

where a

11

, a

12

, a

21

, a

22

, b

1

and b

2

are given parameters of the

dynamical system.

We can write the above system in matrix form as:

x

t+1

y

t+1

=

a

11

a

12

a

21

a

22

x

t

y

t

+

b

1

b

1

or, X

t+1

= AX

t

+ B.

where X

t

represent the time-dependent state vector, A represents

the (time invariant) coecient matrix and B represents the vector

of non-homogenous terms of the system.

Das (Lecture Notes, DSE) Macro August 14, 2014 9 / 18

2X2 System of Linear & Autonomous Simultaneous

Dierence Equations: Solution

One way to solve this system is to iterate the state vector

X

t

x

t

y

t

0

(as we did in the single variable case).

This yields:

X

t

= A

t

X

0

+

t1

i =0

A

i

B.

Once again we can write the general solution to this 2 2 system by

replacing X

0

with some arbitrary matrix C.

The only problem is that it is not so easy to comment on the stability

property of the system because that would involve calculating a

powered matrix and a geometric series on matrices!!

Das (Lecture Notes, DSE) Macro August 14, 2014 10 / 18

2X2 System of Linear & Autonomous Simultaneous

Dierence Equations: Solution (Contd.)

So we shall use the alternative method of Superposition Principle,

which requires nding

a genreral solution to the homogenous part of the system (which is

called the complementary function);

then locating one particular solution to the entire (non-homogenous)

system,

and then adding the complementary function and the particular

solution together to arrive at the general solution to the entire

non-homogenous system.

The homogenous part of the system is given by:

x

t+1

y

t+1

=

a

11

a

12

a

21

a

22

x

t

y

t

2X2 System of Linear & Autonomous Simultaneous

Dierence Equations: Solution (Contd.)

Notice that if the coecient matrix was diagonal (such that

a

12

= a

21

= 0), then nding the general solution to the above

homogenous system would have been very very easy!!

Suppose A is a diagonal matrix given by

a

11

0

0 a

22

. Then the

above homogenous system collapses into two independent

single-variable dierence equations, given by:

x

t+1

= a

11

x

t

;

y

t+1

= a

22

y

t

.

The general solution to the above homogenous dierence equations

are given respectively by:

x

t

y

t

=

C

1

(a

11

)

t

C

2

(a

22

)

t

; C

1

, C

2

arbitary constants.

Das (Lecture Notes, DSE) Macro August 14, 2014 12 / 18

2X2 System of Linear & Autonomous Simultaneous

Dierence Equations: Solution (Contd.)

Having found the complementary functions, the Superposition

Principle now requires identication of a particular solution to the

general (nonhomogenous) system.

Since we are looking only at non-autonomous systems, the equations

would always permit existence of some steady state.

So the easiest way to locate a particular solution is to identify a

steady state of the correponding non-homogenous system.

Notice that when A is a diagonal the non-homogenous system is given

by:

x

t+1

= a

11

x

t

+ b

1

;

y

t+1

= a

22

y

t

+ b

2

.

Das (Lecture Notes, DSE) Macro August 14, 2014 13 / 18

2X2 System of Linear & Autonomous Simultaneous

Dierence Equations: Solution (Contd.)

We can easily calculate the corresponding steady states as follows

(provided a

11

, a

22

6= 1):

x =

b

1

1 a

11

;

y =

b

2

1 a

22

.

Thus we can now write the general solution to the non-homogenous

system of equations (with a diagonal coecient matrix) as:

x

t

y

t

=

C

1

(a

11

)

t

C

2

(a

22

)

t

+

x

y

; C

1

, C

2

arbitary constants.

The stability of the system will of course depend on the values of a

11

and a

22

.

But this is only a special case where the coecient matrix is diagonal.

Das (Lecture Notes, DSE) Macro August 14, 2014 14 / 18

2X2 System of Linear & Autonomous Simultaneous

Dierence Equations: Solution (Contd.)

What about a more general case when the coecient matrix A is

non-diagonal?!

It turns out that a square matrix A can be transformed into a

diagonal matrix by applying a procedure called Diagonalization.

To apply this procedure we need a little knowledge of Matrix algebra,

in particular, the concepts of eigen values and eigen vectors.

Das (Lecture Notes, DSE) Macro August 14, 2014 15 / 18

A Digression: Eigen Values & Eigen Vectors of a Square

Matrix

Consider a square matrix A

nn

.

If there exists a scaler and a non-zero vector X such that

AX = X,

then the scaler is called an eigen value of the Matrix A, and the

vector X is called the eigen vector associated with .

Thus, to nd an eigen value of the matrix A, we have to nd a

non-zero solution to the equation:

[A I ] X = 0,

where I in a n n identity matrix.

The above equation will have a non-zero solution if and only if the

matrix [A I ] is singular or degenerate, i.e., its determinant is zero:

det [A I ] = 0

Das (Lecture Notes, DSE) Macro August 14, 2014 16 / 18

Eigen Values & Eigen Vectors of a Square Matrix: (Contd.)

The above equation is called the characteristic equation of matrix

A.

If A is a n n square matrix, then the LHS of above equation will be

a n-th order polynomial of , and its solution will give us all the eigen

values of matrix A.

For the 2 2 coecient matrix A

a

11

a

12

a

21

a

22

, the characteristic

equation is given by:

det

a

11

a

12

a

21

a

22

= 0

i.e.,

2

(a

11

+ a

22

) + (a

11

a

22

a

12

a

21

) = 0

This is a quadratic equation in , which we can now solve to derive

two eigen values and the corresponding eigen vectors of matrix A.

Das (Lecture Notes, DSE) Macro August 14, 2014 17 / 18

Eigen Values & Eigen Vectors of a Square Matrix: (Contd.)

Using the eigen vectors, one can then construct an invertible matrix

P, which can be used to to transform the original coecient matrix A

into a diagonal (or, in some cases, almost diagonal) form such that

P

1

AP = D,

where D is a diagonal (or, in some cases, almost diagonal) matrix.

This way, one can transform the given system of dierence equations

into a new system, where the coecient matrix of the new system is

none-other-than the diagonal matrix D (and therefore we can solve

the new system very easily).

We shall discuss this transformation mechanism in the next class.

Das (Lecture Notes, DSE) Macro August 14, 2014 18 / 18

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