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

Orlando Gomes

doi:10.1108/01443580910923786

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Journal of Economic Studies

ISSN: 0144-3585

Online from: 1974

Subject Area: Economics

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

Document Information:
Title:	On the stability of endogenous growth models: An evaluation of the agents' response to output fluctuations
Author(s):	Orlando Gomes, (Escola Superior de Comunicação Social (Instituto Politécnico de Lisboa), Lisboa, Portugal and Unidade de Investigação em Desenvolvimento Empresarial – Economics Research Center (UNIDE/ISCTE-ERC), Lisboa, Portugal)
Citation:	Orlando Gomes, (2009) "On the stability of endogenous growth models: An evaluation of the agents' response to output fluctuations", Journal of Economic Studies, Vol. 36 Iss: 1, pp.17 - 35
Keywords:	Consumer behaviour, Fiscal policy, Investments
Article type:	Research paper
DOI:	10.1108/01443580910923786 (Permanent URL)
Publisher:	Emerald Group Publishing Limited
Acknowledgements:	JEL classification – O41, C62 Financial support from the Fundação Ciência e Technologia, Lisbon, is gratefully acknowledged, under the contract No POCT/ECO/48628/2002, partially funded by the European Regional Development Fund (ERDF).
Abstract:	Purpose – The purpose of this paper is to present three modified versions of the simple AK endogenous growth model. Design/methodology/approach – 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. Findings – The author studies the stability properties of the three models and concludes that, on each one of them, a saddle-path stable equilibrium exists. Originality/value – 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.