Essays on growth and macroeconomic dynamics

Abstract

This dissertation is composed of four essays on economic growth and macro- economic dynamics. The first essay analyzes how the dynamic strategic in- teractions among agents a¤ect the long-run distribution of wealth in terms of catching up and the transitional dynamics. It is shown that incorporating the strategic behavior among agents leads to the wealth level of the initially poor and the rich households to be the same at the stationary state. Extending the model by incorporating relative wealth concern; the resulting equilibria depends the valuation of relative wealth concern by each individual and it is proved that under some plausible conditions the catching up occurs thanks to the strategic interaction in the form of open-loop. The stability of these two models are carried out for arbitrary number of people in the economy. In the second essay studies the e¤ects of above mentioned strategic interac- tion in Ramsey model with "Easterlin hypothesis". It is shown that strategic interaction among agents in the economy leads to a change not only in the distribution of wealth but also in the transitional dynamics substantially. The obtained complex dynamics is in the form of Hopf bifurcation which is one of the main tool to explain the economic fluctuations. Third essay of this thesis introduces Stone-Geary Preferences with an endoge- nous reference level of consumption in an Ak model in which reference level of consumption is an increasing function of the capital. It is shown that the result- ing equilibrium presents richer dynamics under such a Stone-Geary preferences. It is proved that endogenous reference level leads to global and local indetermi- nacy: economies starting with di¤erent initial conditions does not necessarily converge to the same steady state and also economies starting with the same initial conditions does not necessarily follow the same transition path. The aim of the fourth essay is to analyze the e¤ects of a pure public good that reduces the subsistence level of consumption on the long run equilibrium and the optimal tax rate. It is shown that although the steady state amount of public good is higher for the first best allocation, the subsistence level of consumption is the same with that of the second best equilibrium. On the other hand, the capital stock and the consumption of the private good are higher for the first best equilibria. Another important result of the essay is the "government revenue-tax rate" locus with a dynamic threshold which depends on the total factor productivity (TFP). The optimal amount of tax rate that maximizes the revenue of the government is an increasing function of the TFP and thus revenue maximizing tax rate varies across countries.