Abstract
Boom and bust cycles are widely documented in the literature on industry dynamics. Rigidities and delays in capacity adjustment in combination with bounded rational behavior have been identified as central driving forces. We construct a model that features only these two elements and we show that this is indeed sufficient to reproduce some stylized facts of a boom and bust cycle. The bifurcation diagrams summarizing the dynamic behavior reveal complex cycles and in particular also abrupt changes in the nature of these cycles. We apply new insights from the mathematical theory of piecewise smooth dynamic systems—in particular, results from the theory of border collision bifurcations—and show that the very existence of borders such as capacity constraints or nonnegativity constraints may lie behind abrupt changes in the dynamic behavior of economic variables.
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Notes
1Not only locally, but also globally, as contact bifurcations and homoclinic bifurcations of cycles.
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This work has been performed within the activity of the project PRIN 2009, MIUR, Italy, and under the auspices of the COST Action IS1104 “The EU in the new complex geography of economic systems: models, tools and policy evaluation”.
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Kubin, I., Gardini, L. Border collision bifurcations in boom and bust cycles. J Evol Econ 23, 811–829 (2013). https://doi.org/10.1007/s00191-012-0300-6
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DOI: https://doi.org/10.1007/s00191-012-0300-6