Attribution Non-Commercial (BY-NC)

103 views

Attribution Non-Commercial (BY-NC)

- Chaos Report
- Posner.economic.analysis
- Review Chapter 3
- Aghion, Algan, Cahuc & Shleifer 2010 - Regulation and Distrust (QJE)
- Financial Disclosure Policy
- Institutions Wages and Inequality
- Microeconomics Cue Card
- [4] - A_control_engineers_guide to SMC
- Demand & Supply - Final
- The Behavior of Interest Rates
- Obesity mathematical model
- Chap 5
- MEP Assignment 3
- gn market
- ganong2017.pdf
- Bifurcations in Dc-dc Switching Converters
- Lecture 1 - Introduction
- wp93_3
- A Primer on Financial Contagion
- Econ301_hw1

You are on page 1of 3

Suman S. Basu, MIT

Recitation 10: Dynamics of the Diamond Coconut Model

The dynamic properties of the Diamond (1982) coconut model of search are analyzed in Diamond and

Fudenberg (1989), "Rational Expectations Business Cycles in Search Equilibrium," Journal of Political

Economy Vol. 97, No. 3 (Jun., 1989), 606-619. This recitation handout draws heavily from William Hawkins

recitation notes (from Fall 2004).

1. System of Equations for Rational Expectations Equilibrium

The system of equations from Darons lecture notes is:

rV

E

(t)

_

V

E

(t) = b(e(t))[y + V

U

(t) V

E

(t)] (1)

rV

U

(t)

_

V

U

(t) = a

_

c

(t)

c

[V

E

t V

U

(t) c] dG(c) (2)

The lecture notes concentrated upon steady state. In this recitation we will examine the out of steady state

dynamics. Therefore we do not want to set

_

V

E

(t) and

_

V

U

(t) equal to zero. Taking the dierence between

the two equations above and noting that V

E

(t) V

U

(t) = c

= S(e; c

) = rc

b(e)[y c

] a

_

c

c

[c

c] dG(c) (3)

This is a necessary condition for the optimal willingness to collect coconuts along any path. If we impose

the transversality condition that c

b(e)) is positive, then the path is optimal. That is, beliefs about willingness to collect coconuts must be

asymptotically correct as well as instantaneously justiable. Impose 0 < c

necessary and sucient.

In addition, we have the equation for the evolution of the fraction of the population with a coconut from

the lecture notes:

e = T(e; c

) = a(1 e)G(c

) b(e)e (4)

Note that time dependence is suppressed in both equations (3) and (4) above.

A Rational Expectations Equilibrium is a solution (e; c

such that e satises the initial condition and c

2. Dynamics on the Familiar Diagram of the Diamond Model

The loci for

c

= 0 and

e = 0 have already been characterized in the lecture notes (Figure 1, page 49). The

= 0 locus is concave and both loci are increasing. This leads to the phase diagram as shown in Figure 1.

For convenience, Figure 1 is drawn so that there are precisely 3 stationary points (steady state equilibria).

It is immediate that there is a range of e (in particular, around the steady state e

1

) for which there are

multiple equilibria.

Figure 2 adds the trajectories going to (0; 0) and (e

2

; c

2

). It is necessarily the case that the trajectory to

(0; 0) lies below the locus for

e = 0 at e

1

, while the trajectory to (e

2

; c

2

) lies above

e = 0 at this point. Since

trading opportunities are better the higher the "employment" rate, the optimistic path Pareto-dominates

the pessimistic path. However, both are equilibrium paths.

1

3. Hopf Bifurcation Example: Special Case 1

Since both the optimistic and pessimistic paths are rational expectations equilibria under some initial condi-

tions, there may be equilibria with "endogenous business cycles" in which traders correctly believe that the

economy will alternate between expanding and contracting phases. We examine the dynamics for a special

case.

Suppose b(e) = e and c Unif[c; c + 1]. Diamond and Fudenberg (1989) analyze the dynamics for this

special case. It can be checked that the

e = 0 locus is convex here for c < k < c.

Observe how the two locuses change with the interest rate r: the

e = 0 locus is unchanged, while the

= 0 locus shifts down monotonically as r increases. Hence for any e 2 [0; e] we can dene r(e) to be the

unique value of r that leads to a steady state at e. One can check that

r(e) =

_

e

1 e

__

a(y c)(1 e)

2

+ (e

3

=2) e

2

e

2

+ ac(1 e)

_

(5)

Figure 3 plots this curve.

Figure 4 from the paper shows an example of an orbit that spirals in to the steady state at (e

1

; c

1

). But

for other parameters, this orbit can be unstable. If the interest rate r varies continuously from spirals in

to spirals out, then one might expect that at intermediate values of r there would be paths that are closed

cycles. In purely linear systems, all paths are cycles at the "bifurcation point" where the spirals switch

direction. This observation is extended to nonlinear second-order systems by the Hopf Bifurcation Theorem.

Using Hopf, Diamond and Fudenberg examine paramters for which cycles occur in the neighbourhood of e

1

.

To determine the systems behaviour near e

1

, we calculate the linearized system around (e

1

; k

1

) (and

express everything in terms of e

1

rather than c

1

):

_

e

_

=

_

2e

1

e

2

1

1e1

a(1 e

1

)

c y +

e

2

1

a(1e1)

r + e

1

+

e

2

1

1e1

_

_

e e

1

c

1

_

This matrix has eigenvalues proportional to t (t

2

4d)

1=2

, where

t = r e

1

d =

_

r + e

1

+

e

2

1

1 e

1

__

2e

1

+

e

2

1

1 e

1

_

a(1 e

1

)

_

c y +

e

2

1

a(1 e

1

)

_

The sign of t, d and t

2

4d determine the behavior of the system around (e

1

; c

1

):

If d < 0 ) Saddle point;

If d > 0 and t

2

4d > 0 ) Node

Stable if t < 0;

Unstable if t > 0;

If d > 0 and t

2

4d < 0 ) Spiral

Stable if t < 0;

Unstable if t > 0;

Some curves for t against d are graphed in Figure 5.

Note that since the same linearization also covers the steady state (e

2

; c

2

), we want to consider only

spirals or nodes: that is, points where d > 0. By continuity, it is clear that there is a range of parameters for

y so that we can nd a solution (e

1

; c

1

) and r so that it is a steady state, with r(e

1

) = e

1

so that t = 0, and

with d > 0 so that the eigenvalues associated with the dynamical system are purely imaginary. Decreasing r

a little makes the trace positive, so that the steady state becomes a spiral source, while for r a little higher

it is a spiral sink.

The Hopf Bifurcation Theorem then ensures that there is some range of interest rates so that for r 2

(r(e

1

) "; r(e

1

)) there is a stable limit cycle for the dynamics.

2

4. Explicit Construction of Limit Cycles: Special Case 2

A case for which limit cycles can be explicitly constructed is the slightly degenerate case where b(e) = e and

the cost distribution is degenerate at c. In this case there are cycles that take the following form: nobody

collects any coconuts in slumps while inventories fall from e to e, followed by booms in which all coconut

collecting opportunities are taken and inventories rise from e back to e. The equations for

e and

_

k are now:

e

_

_

= e

2

c

< c

2 (e

2

; e

2

+ a(1 e)) c

= c

= e

2

+ a(1 e) c

> c

=

_

(r + e)c

ye c

c

(r + e)c

+ a(c

c) ye c

> c

It is possible to show that there exist economies parameterized by (a; r; c) that have such business cycles

for a large range of (e; e) pairs.

5. Williams Graphs

William also included some rather nifty graphs illustrating simulated equilibrium paths and limit cycles. I

enclose these as well.

3

- Chaos ReportUploaded bySanjeewa Thambugala
- Posner.economic.analysisUploaded bydido29
- Review Chapter 3Uploaded byDiamante Gomez
- Aghion, Algan, Cahuc & Shleifer 2010 - Regulation and Distrust (QJE)Uploaded byrcouch8313
- Financial Disclosure PolicyUploaded byTety Indah Aprianti
- Institutions Wages and InequalityUploaded byRAJAT SHARMA
- Microeconomics Cue CardUploaded byKatie Hill
- [4] - A_control_engineers_guide to SMCUploaded byMartin Trujillo
- Demand & Supply - FinalUploaded byAnoop Nimkande
- The Behavior of Interest RatesUploaded byRhazes Zy
- Obesity mathematical modelUploaded byEnrique Lozano
- Chap 5Uploaded bySunil Chaudhary
- MEP Assignment 3Uploaded bySwagatika Singh
- gn marketUploaded byNamita Shrivastava
- ganong2017.pdfUploaded byViver
- Bifurcations in Dc-dc Switching ConvertersUploaded byShradhaSharma
- Lecture 1 - IntroductionUploaded byZen Kok
- wp93_3Uploaded bykarthik g
- A Primer on Financial ContagionUploaded byluizrj82
- Econ301_hw1Uploaded bysaqibriaz8771
- Chapter 3 [Economics]Uploaded byVieDem
- KWe3 Micro Ch5Uploaded byCarlos Soto
- Chap-5Uploaded bywasisi
- EconUploaded byDara Miracle Montalbo
- ECC3830 2017 MidSem & Solutions.pdfUploaded byTim Davies
- Page Title Pananaliksik FinalUploaded byShekainah Grace Menodiado
- chapter 6.docUploaded byPrince Maymay Ismula
- Lecture 2Uploaded bySai
- ACFrOgD-4M1vDNC6XVEVNPe3JcUCSXK2K7z1wX_JTUj2rytquTiYXVeA6tDvmlDjnXn8XCFc_Msy-kg8q4AMZ7wSi3l6Qp5yaMfG-q9gNKBmLd0lP_Ce1AHNikECnKk=Uploaded byMohiminul Khan
- final paper econ 2020Uploaded byapi-239698020

- gallery walk strategyUploaded byapi-248208787
- 2012 Park N. Computer Education s Teaching Learning Methods Using Educational Programming Language Based on STEAM EducationUploaded byJose Gallardo A
- ForecastingUploaded byAmit Roy
- MIT Exam1 s14 SolutionsUploaded byRoumen Guha
- Solutions to Limit ProblemsUploaded byVince Cinco Parcon
- Typeset Latex equationsUploaded byDayasagar VS
- Tutorial 2 Feb 2016Uploaded byNo Name
- Using Hidden Markov Model for Stock Day Trade ForecastingUploaded byPatrick Langstrom
- Com Bi National CircuitUploaded byHazel Zamora
- Analysis of Electroencephologram Data Using Time-Delay Embeddings to Reconstruct Phase SpaceUploaded byqwer1304
- Cone CalculationUploaded byIlham Widyasa
- Homework 2 SolutionsUploaded bylaxative1234567
- DSP Manual Autumn 2011Uploaded byAta Ur Rahman Khalid
- Prestressed Concrete Naman Errata (1)Uploaded byagnayel
- Statistics and ProbabilityUploaded byishaq_ahmed_9
- Physics -Gausss Law Flux and Charge 1Uploaded byMani Pillai
- Key Ratio Proportion Grade 10Uploaded byRugi Vicente Rubi
- AFRL ICSI Visit2 JFA Tutorial IcsitalkUploaded bymarisel
- Vector (Mechanics) 1Uploaded byTushar Ghosh
- Computing Project 3Uploaded bySteve Spicklemire
- Technical Drawing Geometry Portfolio Rubric-Student VersionUploaded byolvernejacobs9741
- Book TotUploaded byCleverence Kombe
- Structural Balance a GeneralizationUploaded byVijay Bantu
- UT Dallas Syllabus for ee4310.501.11s taught by Charles Bernardin (cpb021000)Uploaded byUT Dallas Provost's Technology Group
- InequalitiesUploaded bykrissypainty
- smith emily -grade 1 creating colour integrated unit planUploaded byapi-280000855
- properties of trianglesUploaded byapi-296883216
- Strong Induction ExplanationUploaded bygeorgiandjimmy
- Wilson Fermat EjercicioUploaded byJuancho Parra
- The Method of Random Groups Kirk WolterUploaded byEmmanuel Detrinidad