Time preference and cyclical endogenous growth in an AK growth model

Abstract

The paper develops an AK endogenous growth model with an endogenously determined rate of intertemporal preference. Following some of the related literature, we assume that the degree of impatience that is revealed by the representative agent, regarding future consumption, depends on income. To be precise, the proposed framework establishes a link between the output gap and the discount rate attached to the sequence of future utility functions. We analyze both local and global dynamics. From a local analysis point of view, a variety of stability results is possible to obtain, depending on parameter values. The study of global dynamics allows finding endogenous business cycles in the circumstance in which the representative agent overlooks one essential requirement for optimality. On a second stage, the model is extended to include the role of leisure and, in this case, endogenous fluctuations are compatible with full rationality.