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6 / Deterministic Dynamics
6.5 / Applications
157
6.5
Applications
A Cyclical Example
13-1
= max [kaO(1
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where
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Exercise 6.7 a. Verify that for any ko E [0, 1], there is a unique optimal capital sequence {kt}. That is, verify that this problem satisfies Assumptions 4.3-4.4 and 4.7-4.9. Find the Euler equation. b. Show that the unique stationary point is k* = f3fJ/(1 - fJ + f3fJ). c. Expand the Euler equation around the point k = k* to obtain the linear approximation
W1(kt - k*)
0,
Figure 6.3 B
1 - a(1 - fJ)
a(1 - fJ)
1 - afJ
afJf3 .
In a neighborhood of the stationary point k*, then, optimal paths for capital behave approximately as kt+l = k* + A.I(kt - k*). Since 0< 11.1 < 1, this solution conforms with the conclusion reached in Section 6.1. It also gives information on the speed of convergence, which evidently increases as (f"/f')/(U"/U') increases. Curvature in the technology speeds up convergence; curvature in preferences retards it. This conclusion is also consistent with the results for the limiting case of linear utility in Section 5.3.
Show that both of the characteristic roots Al and 11.2 of this equation are real, that 11.2 = (1311. d -I, and that A I + 11.2 = - B, so that both roots are negative. Under what conditions on a, fJ, and 13 is the stationary point k* locally stable? The remainder of this problem considers the behavior of solutions for the parameter values 13 = 0.1, a = 0.8, and fJ = 0.75.
Exercise
for this case k* For the one state variable dynamic program, where F satisfies Assumptions 4.3-4.4 and 4.7-4.9, and is twice differentiable, show that a. both roots of A are real, b. both roots are positive if F xy > 0, and c. both roots are negative if Fxy < O.
Exercise 6.6
6.7 d. Conclude from your answers to (b) and (c) that = 0.23 and k* is unstable.
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