Business cycles, bifurcations and chaos in a neo-classical model with investment dynamics

Abstract

This paper presents a non-equilibrium dynamic model (NEDyM) that introduces investment dynamics and non-equilibrium effects into a Solow growth model. NEDyM can reproduce several typical economic regimes and, for certain ranges of parameter values, exhibits endogenous business cycles with realistic characteristics. The cycles arise from the investment-profit instability and are constrained by the increase in labor costs and the inertia of production capacity. For other parameter ranges, the model exhibits chaotic behavior. These results show that complex variability in the economic system may be due to deterministic, intrinsic factors, even if the long-term equilibrium is neo-classical in nature.