On the stability of endogenous growth models: An evaluation of the agents' response to output fluctuations

The purpose of this paper is to present three modified versions of the simple AK endogenous growth model.

Such frameworks stress the role of consumers' sentiment, the impact of fiscal policy and the effect of non‐optimal investment decisions made by firms. In all the cases, today's decisions take into consideration the economic performance of the previous period; in the first case, households react pro‐cyclically to the output path; in the second case, a counter‐cyclical fiscal policy is considered; and in the third case, firms adopt a pro‐cyclical behavior concerning investment choices.

The author studies the stability properties of the three models and concludes that, on each one of them, a saddle‐path stable equilibrium exists.

The paper accentuates the relevance of the reaction of the economic agents relatively to the business cycle. By assuming that the behavior of consumers, government and firms is a behavior of reaction to economic fluctuations, we find interesting and relevant results in what concerns the conventional intertemporal optimization growth model.