1 “ A Disequilibrium Growth Cycle Model with Differential Savings ” Serena Sordi DEPFID -Department of Political Economy, Finance and Development University of Siena Workshop MDEF (Modelli Dinamici in Economia e Finanza) Urbino, September 2008 *** Downlodable at ***

2 Abstract: Abstract: This paper extends Goodwin’s growth cycle model by assuming both differential savings propensities and disequilibrium in the goods market. It is shown that both modifications entail an increase in the dimensionality of the dynamical system of the model. By applying the existence part of the Hopf bifurcation theorem, the possibility of persistent and bounded cyclical paths for the resulting 4-dimensional dynamical system is then established. With the help of numerical simulation some evidence is finally given that the limit cycle emerging from the Hopf bifurcation is stable.

3 Velupillai (1979, 1982a, 1982b, 1983 and 2006) Sordi (2001, 2003) Relations with the existing literature: Goodwin (1967) Atkinson (1969, RES), Izzo (1971), Desai (1973, JET), Gandolfo (1973), Maresi & Ricci (1976), Vercelli (1977, EN), , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Desai (2006, JEDC), Velupillai (2006, JMacro), ,  ,  ‘classical’ assumption about savings behaviour equilibrium in the goods market

4 Notation and basic assumptions: Sordi (2001) Sordi (2003)

5 The Model Four building blocks: 1.Real wages dynamics: 2.Savings behaviour: Cugno & Montrucchio (1982) Sportelli (1995) Sordi (2001, 2003)

6 3.Investment equations: where 4.Goods market adjustment mechanism:

7 Dynamical system of the model: We obtain the following complete 4D-dynamical system in the four endogenous variables v, u, ε and σ :

8 Local stability analysis: The model has a unique positive equilibrium point such that: where we must have:

9 At E * : the output and the capital stock grow at a rate equal to the natural rate: the Cambridge equation is satisfied the real wage grows at the same rate as labour productivity: the ‘Pasinetti case’ holds

10 Moreover: where:

11 Under the following two assumptions − which can be shown to hold for a wide range of plausible parameter values, Assumption 1: The desired capital-output ratio is high enough and such that: Assumption 2: The natural growth rate is high enough to satisfy: the signs of all non-zero elements of are uniquely determined

12 Simple calculation shows that the characteristic equation is given by: A, B, and C are all positive are all negative if real or have a negative real part iff if complex iff

13 the bifurcation parameter Selecting the propensity to save out of wages as the bifurcation parameter: such that:

14 Proposition 1: Under Assumptions 1 and 2, if the propensity to save out of wages is sufficiently low and such that the positive equilibrium E * of the dynamical system (15)-(18) is locally asymptotically stable. Proposition 2: Under Assumptions 1 and 2, there exists a value of the propensity to save out of wages: at which the dynamical system (15)-(18) undergoes an Hopf bifurcation. Two propositions:

15 Some numerical simulations of the model:

16

17

18

19 Summing-up and conclusions: We have investigated a generalisation of the growth cycle model and arrived at a version of the model with a four-dimensional dynamical system in the employment rate, the share of wages, the proportion of capital held by capitalists and the capital-output ratio We have utilized the HBT to prove the existence of persistent and self-sustained growth cycles and given numerical evidence that the emerging limit cycle is stable Much remains to be done:  what we have done in this paper provides only a basic understanding of the dynamics of the model  we have negletected many other possible extensions of the model, well established in the literature on the topic