On the stability of endogenous growth models: an evaluation of the agents’ response to output fluctuations

This paper presents three modified versions of the simple AK endogenous growth model. 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 behaviour concerning investment choices. We study the stability properties of the three models and conclude that, on each one of them, a saddle-path stable equilibrium exists.