x] creates an important nonconvexity in asset dynamics, as the discontinuous law of motion for productive wealth generates multiple dynamic equilibria
, with a lower stable dynamic equilibrium at H = [r.
However, Coury and Wen (2009) show that this class of models may have multiple dynamic equilibria
(such as stable n-period cycles) away from the steady state even if the steady state appears to be a saddle.
To study dynamic equilibria
, we follow the same steps as in the two-equation model, beginning with the linearized model and then moving on to the exact nonlinear model.
With respect to dynamic equilibria
under floating exchange rates, there is a nontrivial scope for complex eigenvalues that contributes to both cyclical and non-cyclical fluctuations; in some cases, the fluctuations can be significantly large and explosive.
Special attention is given to the fact that there are multiple dynamic equilibria
compatible with the capital asset pricing model, including the speculative bubble effect.