1

Modeling of economic dynamics 1. Motivated examples 1.1 Deposit growth model. 1.2 Samuelsons model. 1.3 Neo-classical model of economic growth. 1.4 Keynesian model.

2. Difference equations 2.1 Fixed or balance point, example. 2.2 Stable and unstable balance point, example. 2.3 Linear difference systems, example. 2.4 Non-linear difference systems, example. 2.5 Difference equations with delay, example. 2.6 Difference equations with delay and time series.

3. Differential equations 3.1 Equilibrium or balance point, example. 3.2 Stable and unstable balance point, example. 3.3 Linear systems of differential equations, example. 3.4 Non-linear systems of differential equations, example.

4 Chaos in economic systems 4.1 Hyperbolic balance point, example. 4.1 Stable and unstable manifolds, example. 4.2 Homoclinic orbit as a cause of chaos, example.

4.3 Indestructibility of chaos, example.

5 Computer modeling of economic dynamics 5.1 Symbolic image of dynamical system. 5.2 Construction of symbolic image, example. 5.3 Balance points and periodic orbits on symbolic image, example. 5.4 Matrix of transition and global dynamics, example. 5.5 Attractors and their construction, example. 5.6 Localization of recurrent orbits, example. 5.7 Stochastic Markov chains, example. 5.8 Balance method for stationary distribution. 6 Discussion and propositions. he lectures can be understood by anyone who has basic knowledge of calculus and linear algebra.

1. Motivated examples 1.1 Deposit growth model.

Suppose that we deposit amount X0 in a savings account at an annual the interest rate of r. Denote Xn amount at the end of n-th year. At the end of the next year the saving consists of

Xn+1-Xn=rXn.
From this it follows the recurrence relation

Xn+1=(1+r)Xn.
We obtain difference equation. Suppose that interest rate r does not depend on time. Let us check that solution has the form

Xn=X0(1+r)n .
Substitution this expression in left and right parts of the difference equation gives correct equality. Let us consider a continuous case. Denote X(t) amount of deposit at time t. The saving at the time consists of

()

()

where a can be treated as the interest rate. We have

( If

()

()

tends to zero we obtain equality

( )

( )

that contains derivative, i.e. we get differential equation to the deposit. Suppose that interest rate does not depend on time. Substituting the expression

in left and right parts of the differential equation we can verify that the given function is solution of the equation. If the time unit is one year then between coefficient a and interest rate r there is the following connection

If coefficient a depends on time t, the solution has the form

( )

1.2 Samuelsons model.

Let us briefly recall the business cycle model of Samuelson (1939). National income at time t Yt may be written as the sum of three components: consumption Ct, induced private investment It, and government expenditure Gt. Therefore,

Yt=Ct+It+Gt
The agents consume a constant fraction of their past income

Ct =aYt-1
where 0<a<1 stands for the marginal propensity to consume. Induced private investment is proportional to changes in consumption and thus also to changes in national income

It =b(Ct-Ct-1)=ab(Yt-1-Yt-2)
As is well known, ab >0 denotes the relation between the capital stock and output. Since government expenditure is constant G national income may be rewritten as

Yt=G+a(b+1)Yt-1-abYt-2
The recurrence relation in the income variable is a second-order linear difference equation.

1.3 Neo-classical model of economic growth.

Neo-classical model (Swan, 1956) and (Solow, 1956) is based on the following assumptions. (i) Labor (L) grows at a constant rate n i.e.

/L=n

5 (ii)

All saving S = sY are invested in capital (K) by the equality

(s, are constant positive fractions)

(iii) Production takes place under constant returns conditions:

Y = F(K, L) = LF(K/L, 1) = Lf(k) where k = K/L, F is a production function. As an example we consider the Cobb-Douglas production function

Y=K L1- , (0 < < 1).

We have

( )

(
where +n=.

( )

( )

These lead to the fundamental dynamic equation

( )
where f(k) is increasing concave differentiable function f" < 0 < f' For the case of the Cobb-Douglas production function

Y=K L1-,

Y/L= K L-=k =f(k)

and the fundamental growth equation is

1.4 Keynesian model (1936).

Consider a macro economic model in which velocity of income (Y) rises in response to excess demand (D Y).

For a simple closed economy, with investment (I) and government expenditure (G) both given, demand is consumption (C) plus I plus G.

D=C+I+G
Consumption is an increasing function (assumed linear) of income, i.e.

C = c0 + cY
where c0>0, 0<c<1. The dynamic model is, for a constant positive k,

This is a typical first order linear differential equation of the form

2. Difference equations 2.1 Fixed or balance point, example.

A difference equation expresses the change of economic state as a function of the current state. The system of difference equations can be expressed in the vector form

x(t + 1) = f(x(t)) or
d

xn+1=f(xn )

where x R describes the state of economic system, t (or n) is descrete time,

xn+1 is future state of the system and xn is present state of the system.
Orbit or trajectory with initial point x0 is a sequence of points

O(x0 )={., x-1, x0, x1, x2, }

that satisfy the system of difference equations xn+1=f(xn ). A simple illustration of an orbit is a fixed point

{xn =x0 }.
It describes a state of economic system that doesnt change in time. The fixed point is called equilibrium or balance point. Balance point x* is determined as solution of the equation

x*=f(x*).
Example (The Cobweb Cycle). Consider the supply S(t) and demand function D(t) for a commodity

( ) ( ) (

( ) )

where , , , are constants and p(t) is price in time t. While demand D(t) is a function of current price p(t), supply D(t) is a function of price prevailing on the market at some previous period, p(t-1). If

D(t)=S(t)
then ( ) ( )

( )

where

The fixed point of the equation gives price P* such that is not change in time p(t)=p(t-1)=P*

P*=aP*+b
From this it follows P*=b/(1-a).

2.2 Stable and unstable balance point, example.

Consider a teeter for children or a pendulum on a rigid suspension

There are two equilibriums: lower equilibrium and upper equilibrium. It is clear that lower equilibrium is stable and upper equilibrium is unstable. Suppose that we found a balance state X* in economic system. What happens if we start a dynamic process not from the balance X*, but from the point x0 closest to it? Definition An equilibrium point X* is stable if every solution that starts at a point x0 close to it, will stay close to X* at all future time. More formally, X* is said to be stable if for any >0 there exists >0 such that if the |x0-X* |< than |xn-X* |< for any n>0, xn+1=f(xn ). A fixed point X* is called asymptotically stable if X* is stable and there exists 0 such that if |x0-X*|< 0 then xn tends to X* if n-->. Example Consider very simple linear difference equation

xn+1= a xn

The fixed point is X*=0. It is not hard to establish that solution of the equation has the form

xn=x0an.
If |a|<1 then xn0 as n . This means that the fixed point X*=0 is asymptotically stable. If |a|>1 then |xn| as n. This means that the fixed point X*=0 is unstable. If |a|=1 then |xn|=|x0| for any n. This means that the fixed point X*=0 is stable, but it is not asymptotically stable. Example (continuation of the Cobweb Cycle). We study the case when the supply Sn and demand function Dn for a commodity satisfy equalities

Dn =+pn, Sn=+pn-1
From these suppositions we obtain the difference equation for price

pn=apn-1+b,
where a=/, b=(-)/ . The equation has a fixed price

P*=b/(1-a).
Let us find conditions for stability of the fixed point P*. Introduce new variable

x=p - b/(1-a)
that is difference between p and the fixed point P*. Then from

p= b/(1-a) +x
and the equation

10

pn+1=apn+b
it follows equality

b/(1-a) +xn+1=a(b/(1-a) +xn ) +b.

We obtain the difference equation

xn+1=a xn
where a= / >0. If a<1 (or <) then xn0 and the fixed price P*=b/(1-a) is asymptotically stable, if a>1 (or > ) the fixed price is unstable.

2.3 Linear difference systems, example.

Let us consider a square matrix A of size nxn. A value and vector v to be an eigenvalue and eigenvector of the matrix A if are said

Av=v or (A-E)v=0,
where E is the identity matrix. The equation has solution v it is necessary

det(A-E)=0.
Eigenvalues are determined from this equation. Stability theorem. Let us consider a linear system of difference equations

xn+1=Axn.
1) The fixed point x=0 is asymptotically stable if and only if module of each eigenvalue of the matrix A | |<1. 2) The fixed point x=0 is stable if module of each eigenvalue of the matrix A

11

| |1. 3) The fixed point x=0 is unstable if and only if there exists an eigenvalue of the matrix A such that | |>1. Two-dimension matrix

A=(

),

(A-E)=(

),

det(A-E) = (a-)(d-)-cb = 2-(a+d) +ad-cb.

The value

trA=a+d
is called trace of matrix A and

ad-cb=detA
is determinant of A, so eigenvalues is solution of quadratic equation

2 - trA + detA=0
( )

The value

=(trA)2-4detA
denotes discriminant. If >0 there exists two different real eigenvalues 1 and 2. If =0 then real eigenvalue =trA/2. If <0 there exists two complex eigenvalues

12=trA/2
where

=i,

trA/2= ,

=.

12

Module of complex number z= +i is |z|=

If discriminant <0 then |1|=| 2| and since |detA|= |1|| 2|, the condition |detA|<1 guarantees asymptotic stability.

Tasks 1. Find a matrix A such that the difference system xn+1=Axn. is unstable (stable). 2. Construct matrix with complex eigenvalues. 3. Investigate dynamics of system xn+1=-a xn, yn+1= bxn, 0<a, b<1; and 0<a<1<b. 4. Investigate dynamics of 2-dimensional system with complex eigenvalues.

13

a) b) c) d) e) f)

are real number, are real number, are real number, are real number, i are complex number, i are complex number,

, , , , , ,

Example. Samuelsons model (continuation).

Recall that Samuelsons model of national income is a second-order linear difference equation ( )

14

Where yn+1 is the income in the future period, yn is the income in the current period and yn-1 is the income the previous period of production. So yn-1 is named delay. The equation has a unique balance (fixed) point

y*=G/(1-a)
that does not change in time. To study stability of the balance point we rewrite the equation as system without delay { From the first equation it follows If it is substituted in the second equation, we get the Samuelsons model. The system has fixed point (G/(1-a), G/(1-a)). The matrix of the linear system has the form ( ( ) ) ( )

Furthermore, the conditions for stability are determined by eigenvalues of A.

( (

))

The condition 0<a<1, 0<ab<1 implies stability of the fixed point. The condition

a(b+1)2<4b
generates negative discriminant and the complex eigenvalues that implies cyclical motion around the fixed point.

2.4 Non-linear difference systems, example.

Let us consider general system of difference equations

x(n+1)=f(x(n)),
where x Rd, f(x) is smooth mapping. Suppose that x=x* is a fixed (or balace) point, x*=f(x*). If x lies close to x* we can rewrite the mapping f(x) in the form f(x)= f(x*)+D(x-x*)+r(x), where D is matrix and r(x) is a small remaider.

15

The matrix D is called Jacobi matrix and has the form

),

where derivatives are calculated at x=x*. Since x*=f(x*), the system can be represented as x(n+1) x*+D (x(n)-x*) Put y=x-x*, then or x(n+1)-x* D (x(n)-x*).

y(n+1) D y(n).
Thus the system near fixed point is like as linear system. Grobman-Hartman Theorem. Consider system of difference equations

x(n+1)=f(x(n)),
x* is a fixed point. If matrix D has eigenvalues and ,

then the system near the fixed point x* is equivalent to the linear system

y(n+1)=D y(n). Example

The map f has the form

( (

) ) )

( ( )

) )

where a=1.35. The fixed point is (0, 0) and Jacobi matrix at (0,0) has form

The eigenvalues are solutions of equation det(D- E)=0, or

(1+a- )(1- )-a=0

-(2+a) +1=0.

16

Then

,
This implies that eigenvalues the discrete system and

.
. By Grobman-Gartman Theorem

xn+1=xn+yn+axn(1-xn), yn+1= yn+axn(1-xn)

near the fixed point (0,0) is equivalent to linear system

xn+1=(1+a)xn+yn, yn+1= axn + yn.

Let us investigate this linear sysem. Eigenvalues

, .
Eigenvector v1 is determined by equality

Dv1=

v1

or

(D-

E)v1=0.

The system in coordinates v1 = (x, y) has the form

(
or

)( )

( )

(1+aax+(1Since det(D-

)x+y=0 )y=0

E)=0,

17

the second equality follows from the first one. Please, check this. This means that its enough to solve the first equation

(1+aThere are many solution, one of them is

)x+y=0.

v1=(1,

-1-a)=(1, 0.66)

From equality

Dv1=

v1
as well. Thus the

It follows that vector v=tv1, t 0 is an eigenvector for eigenvectors form straight line or linear subspace

L1={ v=tv1, t

which is invariant to the linear mapping

D: vDv, that is if v L1 then Dv

Linear system

L1.

xn+1=(1+a)xn+yn, yn+1= axn + yn

is rewrited in the form

( or
If v0

)(

vn+1=Dvn. L1, then all vn L1 for any n.

Moreover

vn=(

)n v0=(

)n v0.
=3.019.

This means that linear system expands on L1 with coefficient

18

Because of this the linear line L1 is named unstable subspace and denote L . Simillar, all eigenvectors v2 (to eigenvalue called stable subspace. If v0 ) form linear subspace L which is
s

L2, then all vn L2 for any n and

vn=(

)n v0=(

)n v0.
s

The linear system on L compresses with coefficient

=0.331.

V2=(1,

-1-a)=(1, -2.019)

An equilibrium point is called hyperbolic point if

The origin (0,0) is hyperbolic balace point for the system of difference equations

xn+1= xn+yn+axn(1-xn), yn+1 =yn+axn(1-xn)).

Moreover, this nonlinear system near (0,0) is equivalent to linear system

)(

).

2.5 Difference equations with delay, example.

Consider difference equations of the form

vn+1=f(vn,vn-1,vn-2,).

19

This means that future state vn+1 of economic system depends not only on present state vn but also on other previous states vn-1, vn-2, . Example. Suppose that vn is volume of production, n is number of periods of production. We will determine the volume of production by formula

vn+1=vnexp(a(H-vn)),
where a is positive adapt coefficient and H can be treated as maximum volume that can be sold in one period. If vn<H, production increases and if vn>H, production decreases. Let the product have a shelf life equal to three periods of production. This means that market has fraction of products vn, vn-1, vn-2. Suppose that during n-th period sale consists of

bvn+ cvn-1+ dvn-2

where b,c,d>0 and b+c+d=1. Then formula of production take the form

vn+1=vnexp(a(H-(bvn+ cvn-1+ dvn-2))).

We obtane an equation with delay. Any difference equation with delay can be presanted as system difference equations without delay. Consider our example and put

xn+1=yn,

20

yn+1=zn, zn+1= znexp(a(H-(bzn+ cyn+ dxn))).

From the second equation it follows

yn=zn-1.
From the first equation it follows

xn=yn-1 =zn-2.
Finaly we have

zn+1= znexp(a(H-(bzn+ czn-1+ dzn-2))).

2.6 Difference equations with delay and time series. Takens Theorem. (Takens F. Detecting strange attractor in turbulence.
Math., 1981. -- v.898 -- Berlin: Springer -- 89-94.) Lect. Notes in

Let xn+1=(xn) be a dynamical system, x lies in R , and there is an observed value

vn =h(xn)
Let us construct m-vectors

(that is time series {vn}).

zn=(vn-m+1, vn-m+2, ... , vn)

then (in typical case) as m>2d there exists mapping

F:RmRm ,
that gives dynamical system

zn+1=F(zn).

21

The last equation is a difference equation with delay

vn+1=fm (vn,vn-1,,vn-m+1).
Theorem say that any time series in the described conditions can be presented as a difference equations with delay. Example. The time series of production. Let us consider a statistic data of production

x0, x1, x2, x3, , xk.

Our aim is to find parameters of function that gives an opportunity to prognose the production. We will determine the volume of production by formula

vn+1=vnexp(a+bvn)),
where parameters a and b will be determined by method of least of squares. We can rewrite the formular in the form ( Using the production data )

x0, x1, x2, x3, , xk

we construct other data

y1, y2, y3, , yk

putting

yn=ln(xn/xn-1)=ln(xn)-ln(xn-1).
The equation to parameters a and b takes the form

22

y=a+bx.
The method of least of squares is to find a and b that the expression

takes the minimum value. We know the statistic data { (xi, yi) } and the parameters a and b are determined from the equations

)(

)(

The first equation is transformed to

where

23

The second equation is transformed to

where is arithmetical mean. We obtain formulas for a and b

3. Differential equations 3.1 Equilibrium or balance point, example.

A differential equation expresses the derivative (velocity) of change of state as a function of the current state. The system of differential equations can be expressed in the vector form

( ( ))
d

or

( )

where x R describes the state of economic system, t is time. Denote by X(x,t) solution of the system of differential equations, with initial conditions X(x,0)=x. Trajectory with initial point x0 is the curve

T(x0 )

}.

A simple illustration of trajectory is an equilibrium or balance point

T(x0 )={x0}

or

X(x0,t)=x0, as

Equilibrium or balance of economic system is a state that doesnt change in time. Balance point x* is determined as solution of the equation

f(x*)=0.

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Example.

(Continuation of Solow model.)

The differential growth equation is

,
The equation has two equilibrium or balance points which are determined by the equation

-k+sk=0 k=0

or and

k(s- k1- )=0 k1-=s/.

The first balance point k=0 is not interesting for us, because k=0 means that there is no production. The second balance is point of view.

k= k*=(s/)1/(1-) and is very important with practical

3.2 Stable and unstable balance point, example.

Definition An equilibrium point x* is stable if every solution starting at a point x0 close to

x*, will stay close to x* at all future time.

More formally, x* is said to be stable if for any >0 there exists >0 such that if the distance

|x0-x* |< than |X(x0,t)-x* |< for any t>0.

A balance point x* is called asymptotically stable if x* is stable and there exists 0 such that if |x0-x*|< 0 then X(x0,t) tends to x* if t. Example Consider very simple linear differential equation

The balance point is x*=0. It is not hard to establish that

25

X(x,t)=xeat
is a solution of the equation. If a<0 then xe 0 as t . This means that the fixed point x*=0 is asymptotically stable.
at

If a>0 then |xeat| as t.

This means that the fixed point x*=0 is unstable.

If a=0 then xeat =x for any t .

This means that the fixed point x*=0 is stable, but it is not asymptotically stable.

3.3 Linear systems of differential equations, example.

Let us consider a square matrix A of size nxn. Eigenvalues of A are determined from the equation

det(A-E)=0,
where E is the identity matrix. Two-dimension matrix

A=(

),

(A-E)=(

),

det(A-I) = (a-)(d-)-cb = 2-(a+d) +ad-cb.

The value trA=a+d is trace of matrix A and ad-cb=detA is determinant of A, so eigenvalues is solution of quadratic equation

2 - trA + detA=0
( )

The value

26

=(trA)2-4detA
is discriminant . If >0 there exists two different real eigenvalues 1 and 2. If =0 then real eigenvalue =trA/2. If <0 there exists two complex eigenvalues

12=spA/2
where

= i, =,

trA/2= ,

=Re is called real part of and =Im is called imaginary part of . Stability theorem.
Let us consider a linear system of differential equations

1) The balance point x=0 is asymptotically stable if and only if real part of each

eigenvalue of the matrix A Re <0.

2) The balance point x=0 is stable if real part of each eigenvalue of the matrix

A Re 0. 3) The balance point x=0 is unstable if and only if there exists an eigenvalue of the matrix A such that Re >0. Example Let us consider linear

27

Solution has the form X(x,y,t)=xCos(t)+ySin(t), Y(x,y,t)=-xSin(t)+yCos(t), Check, please! Let us calculate (X(x,y,t))2+(Y(x,y,t))2=x2+y2. The value r2=x2+y2 is square of the distance between the point (x,y) and origin of coordinate (0,0). This means that the trajectory lies on circle of radius r= Matrix ( has eigenvalues ) and center (0,0). X(x,y,0)= x, Y(x,y,0)=y.

, Re
Since Re

=0.

=0, the balance point (0,0) is stable but not asymptotically stable.

Tasks 1. Find a matrix A such that the system of differential equations

x=ax+by, y=cx+dy.
is unstable (stable). 2. Construct the system of differential equations with complex eigenvalues. 3. Investigate dynamics of system

x=-a x, y= bx, 0<a and 0<b.

28

4. Investigate dynamics of 2-dimensional system with complex eigenvalues.

a) b) c) d) e) f)

are real number, are real number, are real number, are real number,

, , ,( ,( ), ),

i are complex number (Re =0), i are complex number, Re =>0.

29

Classification of balance points for linear systems of differential equations.

The following diagram classifies the balance points of the linear system according to the values of

p = trace(A), q = det(A), and d = disc(A).

The parabola, p - 4 q = 0, is the locus of points (p, q) for which d = 0.
2

In the region of the (q, p) plain enclosed by the parabola, d = p - 4 q < 0. Consequently, the eigenvalues 1 and 2 are complex numbers. If p is not zero, complex eigenvalues result in spiral trajectories. If p = 0, eigenvalues are purely imaginary and trajectories enclose the fixed point in ellipses or circles. If p > 0 and q > 0 (the positive quadrant of the (q, p) plain), both eigenvalues have positive real parts (or are purely positive numbers), and the fixed point is unstable. If p > 0, and q = 0, one eigenvalue is positive and the other is zero: the trajectories are unstable lines. Conversely, if p < 0 and q > 0 (the negative quadrant), both eigenvalues have negative real parts (or are purely negative numbers), and the fixed point is stable. If p < 0, and q = 0, one eigenvalue is negative and the other is zero: the trajectories are stable lines.

30

However, if q < 0, one eigenvalue is a positive number and the other is negative: trajectories follow the saddle point pattern.

3.4 Non-linear systems of differential equations, example.

Let us consider general system of differential equations

( )
where x R , f(x) is smooth mapping. Suppose that x=x* is an equilibrium (or balace) point,
d

f(x*)=0.
If x lies close to x* we can rewrite the mapping f(x) in the form

f(x)= f(x*)+D(x-x*)+r(x),
where D is matrix and r(x) is a small remaider. The matrix D is Jacobi matrix and has the form

),

where derivatives are calculated at x=x*. Since f(x*)=0, the system can be represented as

(
Put y=x-x*, then

Thus the system near fixed point is like as linear system. Grobman-Hartman Theorem. Consider a system of differential equations

( )

31

x* is an equilibrium point. If matrix D has eigenvalues

then the system near the equlibrium point x* is equivalent to the linear system

Example.

(Continuation of Solow model.)

The differential growth equation is

,
The equation has two equilibrium or balance points which are determined by the equation

-k+sk=0.
The equation has solutions

k=0

and
1/(1-)

k1-=s/.

The second balance is k= k*=(s/) and is very important. Its stability is determined by the derivative of the right side of the equation

and as

k=k*=(s/)1/(1-)
the value

-+sk-1 = - (1-)<0.
This means that the balance k* is stable and any trajectory tends to k*.

4 Chaos in economic systems 4.1 Hyperbolic balance point, example.

Consider a system of difference equations

x(n+1)=f(x(n)),

32

where x lies in R . Suppose that a point x* is fixed point, i.e. x*=f(x*). Recall that the point is hyperbolic if the eigenvalues of the matrix ( satisfy inequality subspaces) such that ( ))
s u

. There exist stable L and unstable L lines (or

s s u s u

DL = L , DL = L , matrix D expands on L and D contracts on L .

u

Theorem. Let x* is a hyperbolic fixed point of difference system x(n+1)=f(x(n)), x R2 then the set of points Ws={x: fn (x) x* for n }
is a curve that is tangent to stable subspace L and the set of points
s

Wu={x: f -n (x) x* for n }

is a curve that is tangent to unstable subspace L .
u

Ws and Wu are called stable and unstable manifolds. Algorithm for construction Wu:
Let L is a small segment that intersects W then the iterates f (L) converge to the unstable manifolds W as n . Example Consider the mapping
n u s

f(x,y)=( 1.1x-0.1y sin(x), 0.7y+0.5x2) (0, 0) is a fixed point

33

D=(
0.03). Iterations fn(L) have the form:

),

The segment L starts at the point (0.31, 0.31) and finishes at the point (-0.3,

Example (Line3) Let us continue to study hyperbolic point of the mapping

f(x,y)=(x+y+ax(1-x), y+ax(1-x)), a=1.35

Unstable manifold of this mapping has very complicate behavior

Algorithm for construction Ws:

Let L be a small segment that intersects W .
u

34

The iterates f (L) converge to the unstable manifolds W as n .

-n

Conctrustion inverse mapping

Let the mapping f has form

f(x,y)=(f1(x,y), f2(x,y))
Problem is to construct f . Set
-1

X =f1(x,y), Y= f2(x,y).
Solve this system wth respect to x and y. We get equalities

x=g1(X,Y), y=g2(X,Y).
Then the mapping G(X,Y)=(g1(X,Y), g2(X,Y)) is inverse to initial one. Example

Let f(x,y)=(x+y+ax(1-x), y+ax(1-x)), X= x+y+ax(1-x), Y= y+ax(1-x),

We have

X= x+Y x=X-Y, Y= y+ax(1-x) y=Y- ax(1-x)=Y-a(X-Y)(1-(X-Y)).

Thus the mapping

G(X,Y)=(X-Y, Y-a(X-Y)(1-(X-Y))
is inverse mapping to f(x,y)=(x+y+ax(1-x), y+ax(1-x)).

35

It can be used to construction stable manifold W

4.2 Homoclinic orbit as a cause of chaos, example.

Homoclinic point Let x* is hyperbolic fixed point, a poit x0 is called homoclinic if

fn(x0) x* as n+
s

and nu

This means x0 lies in the intersection W and W . Orbit of the homoclinic poit

T={x=fn(x0), n=0, 1, 2, 3, }
is called homoclinic orbit, it starts and finishis at the hyperbolic point x*. Existence homoclinic point generates nontrivial dynamics near the orbit T. Dynamics around a homoclinic orbit is very complicated, hard to predict and has stochastic character. Such behavior is called CHAOS. Let x* is honoclinic poit or intersection point W and W . This inresection is called transversal if angle between W and W greater than zero. Program Line2
s u s u

36

Let x0 is honoclinic poit or intersection point W and W . This inresection is called transversal if angle between W and W greater than zero.
s u

Smale Theorem
S.Smale showed that near to transversal homoclinic orbit there exists a collection of orbits which can be coded by all possible binary sequences. In particular, periodic sequences correspond to periodic orbit of the same period. This implies the existence of periodic orbits of any large period near homoclinic orbit. Example Let us continue to study hyperbolic point of the mapping

f(x,y)=(x+y+ax(1-x), y+ax(1-x)), a=1.35

We can get coordinates of the transversal homoclinic point by computer x = 0.009848517670, y = -0.019195942408 Smale theorem guarantees existence of chaos in this case. Problem Let us investigate a system of differnce equations

(xn+1, yn+1)=(f1(xn, yn), f2(xn, yn))

where f and f2 is the form

f1(x,y)=x+y+ax(1-x2), f1(x,y)=y+ ax(1-x2),

37

where a=0.4. The fixed point is (0,0) and Jacobi matrix at (0,0) has form

(
The eigenvalues are solutions of equation

(1+a- )(1- )-a=0 or

Then

-(2+a) +1=0.

,
This implies that eigenvalues the discrete system and

.
. By Grobman-Gartman Theorem

x(n+1)=x(n)+y(n)+ax(n)(1-x(n)2), y(n+1)= y(n)+ax(n)(1-x(n)2)

near the fixed point (0,0) is equivalent to linear system

x(n+1)=(1+a)x(n)+y(n), y(n+1)= a x(n) + y(n).

Let us investigate the linear sysem.

, .
Eigenvector v1 is determined by equality

Dv1= (

v1

or

(D-

E)v1=0 ( )

)( ) (1+a)x+y=0

38

ax+(1Since

)y=0

det(D-

E)=0,

the second equality follows from the first one. This means that its enough to solve the first equation

(1+aThere are many solution, one of them is

)x+y=0.

v1=(1,

-1-a)=(1, 0.46)

We can get coordinates of the transversal homoclinic point by computer Smale theorem guarantees existence of chaos in this case. x = -0.085871691404, y = 0.017047586207

4.3 Indestructibility of chaos, example.

Let a system have a hyperbolic fixed point x* and transversal homoclinic point X*. Suppose that the system is perturbed by small perturbation. If the perturbation is sufficiently small then the perturbed system has hyperbolic fixed point x** close to x* and transversal homoclinic point X** close X*. Smale theorem guarantees existence of chaos in this case. Example Let us consider a system of differnce equations generated by the mapping

39

f1(x,y)=x+y+ax(1-x2), f1(x,y)=y+ ax(1-x2),

with the perturbed parameter a=0.5.

5 Computer modeling of economic dynamics 5.1 Symbolic image of dynamical system.

Let an economic system have n states {i, j, q, }. For each state i it is fixed admissible transition from i to some states {q, l, } in unit of time. Consider a directed graph G that has n vertices corresponding to the states

{i, j, q, } and has edges {iq} corresponding to the fixed admissible passes.
The constructed graph G is called symbolic image of the dynamic system.

40

An infinite in both directions sequence {zk} of vertices is called an admissible path (or simply a path) if for each k the graph G contains the directed edge

zk zk+1.
A path {zk} is said to be p-periodic if

zk=zk+p
for each k. An admissible path describes dynamics of the economic system.

5.2 Construction of symbolic image, example.

There are many methods for constructing a symbolic image. In any case preliminary information is needed. It may be expert estimates, the information obtained from the reports, mathematical calculations and models. Example. Let us consider dynamical system generated by the forced Duffing system

in the domain M=[-2,2]x[-2,2]. The system is -periodic in t. Construct a covering of the domain M. The covering consists of the boxes M(i) of the size 0.25x0.25. So we have 16x 16=256 cells. Each cell is identified with the state of the system.

41

The numbering of the sells starts from the left-upper corner and finishes to the right-down corner. Let m(i) be a finite set of points in M(i). The placement of points may be systematic or random. Let (X(x,y,t),Y(x,y,t)) be solution of the system and mapping

f(x,y)= (X(x,y, ),Y(x,y, ))

be the shift along the trajectories on the period T=

The image of points f(m(i)) is an approximation of the image f(M(i)). We can check by computer the inclusions

f(x,y) M(j), (x,y)

and if the inclusions hold we fix the edge

m(i)$

i j.
Let us consider the described construction and take as example cell M(87), see picture. The image of the cell M(87) is shown in Figure

The image f(M(87)) intersects the cells M(213), M(214), M(229,) and M(230).

42

So we have the edges 87213, 87214, 87229, and 87230 in the graph G The same way we can construct each edge and, hence, the symbolic image. Let us consider a discrete dynamical system generated by a system of difference equation

xn+1=f(xn)
where x lies in a domain M R . Let
d

C={M(1),...,M(n)}
be a finite covering of the domain M by closed cells. We identify the cell M(i) with the state i. We will say that there exists (admissible) transition from i to j if the

image f(M(i)) intersects the cell M(j) ( ( ))

The existence of the edge ()

guarantees the existence of a point x in the cell is a trace

M(i) such that its image f(x) lies in M(j). In other words, the edge of the matching x f(x), where x M(i), f(x) M(j).

Let G be a directed graph with vertices {i} corresponding to cells {M(i)}. Two vertices i and j are connected by the directed edge i j if there is admissible transition

. The graph G is called the symbolic image of f with respect to the

covering C. A symbolic image is a geometric tool to describe the quantization process. We can consider the symbolic image as a finite approximation of the mapping $f$. It would appear natural that this approximation describes dynamics more precise if the mesh of the covering is smaller. By investigating the symbolic image we can analyze the evolution of a system. It is easily to note that there is a correspondence between orbits of a system and the paths on G. The investigation of the symbolic image permits to get valuable information about the global structure of economic system.

43

5.3 Balance points and periodic orbits on symbolic image, example.

Suppose the economic system has fixed (or balance) point x* that lies in M(i). Since the balance point does not change in time the point x* lies in the intersection ( ( )) That implies existence transition ()

ii.
Suppose the system has periodic regime

i1, i2, i3, , ip,

that implies existence transitions

i1i2 i3 ip i1
and periodic path {i1, i2, i3, , ip} on the symbolic image G.

Task Find 1) balance states, 2) periodic paths. How many difference periodic paths?

44

5.4 Matrix of transition and global dynamics, example.

The directed graph G is uniquely determined by its nxn (adjacency) matrix of transitions ( where ) .

if and only if there is the directed edge i j, otherwise

It should be remarked that if there is mapping f:MM we can consider the matrix of transitions independently of the symbolic image by putting

if ( ( )) if ( ( ))
Let ( be the square the transition matrix, where )

() ()

and upper script 2 stands for an index (not for power). Clearly,

45

if and only if and

otherwise ,

So

if and only if there exists the path

i k j
from i to j through k. Then the sum is the number of all admissible paths of length 2 from i to j. In the similar way one can verify that the element of the power

is the number of all admissible paths of length p from i to j. A vertex of the symbolic image is called recurrent if there is a periodic path passing through it. The set of recurrent vertices is denoted by RV. Two recurrent vertices i and j are called equivalent if there is a periodic path containing i and j. According to the definition, the set of recurrent vertices RV decomposes into classes {Hk} of equivalent recurrent vertices. In the graph theory the classes Hk are called a strongly connected components of the graph G. Task Determine recurrent and non-recurrent vertices. Find classes of equivalent recurrent vertices.

46

Proposition.
The vertices of a symbolic image G can be renumbered so that the equivalent recurrent vertices are numbered with consecutive integers and the transition matrix has the form

( where the elements under the diagonal blocks are zeros,

each diagonal block corresponds to either a class of equivalent recurrent vertices Hk or a non-recurrent vertex. In the last case coincides with a single zero. The described renumbering is not uniquely defined. Task Determined described renumbering for the graph considered above.

5.5 Attractors and their construction, example.

Consider discrete dynamical system generated by system of difference equations

xn+1=f(xn).

47

The set S is called invariant if from an inclusion

it follows the inclusions

and ( ) . This means that the orbit (or trajectory) of x has to be in S. So invariant set is an union of orbits. An invariant set A is called attractor if there exists a neighborhood U(A) of A such that iteration of closure lies in : ( )

( )

and positive iterations

( ) tend to A: ( )

Asymptotically stable balance point is an example of attractor. The set ( ) ( )

is called the domain of attraction or the basin of A. Suppose that we construct a symbolic image by method described above and numbering of vertices is according to the Proposition. Transition matrix has the form

where the elements under the diagonal blocks are zeros, each diagonal block corresponds to either a class of equivalent recurrent vertices Hk or a nonrecurrent vertex. In the last case coincides with zero. Under this numbering there is no admissible path from a class Hp to a class Hq if q<p:

48

As the numbering of rows of the transition matrix coincides with the numbering of the vertices, we have to move in the same class or to go down, as the following scheme shows.

Hence we cannot get higher than Hk. Consider a collection B of vertices of G. We say that B is an attractor on G if one can get into the A, but one cannot get out. Thus, each class Hk generates an attractor consisting of the vertices of numbers (indexes) more or equal to the numbers of the ones from Hk. Proposition Suppose G be symbolic image of the mapping f constructed by method described above and B is an attractor on G. Then the union of cells is a neighborhood such that ( ) and is an attractor of the mapping f. According to this Proposition we can determine attractors by symbolic image. ( ) ()

Task. Find attractor of the symbolic image

49

Strange attractors.
There are many attractors with so nontrivial structure that they are called "strange attractors". By this is meant that the attractor is chaotic, i.e., it has a dense orbit and a nontrivial fractal structure. Henon explored numerically the mapping

f(x,y)=(1-ax2+y, bx).
Henon's computation represents numerical evidence of the existence of a strange attractor for the case a=1.4 and b=0.3. The Henon attractor has the form

Ikeda Attractor. The Ikeda system of difference equations has the form

( (
where r=2, a=-0.9, b=0.9, chaotic attractor of the form

) ) ( ). The system has a

50

5.6 Localization of recurrent orbits, example.

Consider a system of difference equations

xn+1=f(xn)
where x lies in Rd. For a given an infinite in both directions sequence

is called an -orbit (a pseudo-trajectory or a pseudo-orbit) of f if for any k the distance

( (
Example

On the plane R2 consider a map of the form

f(x,y)=(y, 0.05(1-x2)y-x).
Let us check that the sequence

x1=(2,0), x2=(0,-2), x3=(-2,0), x4=(0,2), xk+4=xk

forms a 4-periodic -orbit for any >0.1. In fact,

f(2,0)=(0,-2), &

(f(x1),x2)=0, (f(x2),x3)=0.1,

f(0,-2)=(-2,-0.1), & f(-2,0)=(0,2), &

(f(x3),x4)=0,

51

f(0,2)=(2,0.1), &

(f(x4),x1)=0.1.

We can consider the transition from the point (-2,-0.1) to the point (-2,0) and from the point (2,0.1) to the point (2,0) as jumps or corrections of the value 0.1. So we have a 4-periodic -orbit for any >0.1. A point x is called chain recurrent if x is -periodic for each exists a periodic -trajectory passing through x. , i.e., there

A chain recurrent set, denoted Q, is the set of all the chain recurrent points. It is known, that the chain recurrent set Q is invariant, closed, and contains periodic, homoclinic, nonwandering and other singular trajectories. It should be remarked that if a chain recurrent point is not periodic and then there exists as small as one likes perturbation of f for which this point is periodic. One may say that a chain recurrent point may become periodic under a small perturbation of the map f. Let us consider a symbolic image G of the mapping f with respect to a covering C. Recall that a vertex of the symbolic image is called recurrent if a periodic path passes through it. Denote by P(d) the union of the cells M(i) for which the vertex i is recurrent, i.e., ( ) { () }

where by d is the largest diameter of the cells M(i). Theorem. 1. The set P(d) is a closed neighborhood of the chain recurrent set

52

( ) 2. The chain recurrent set Q is limit of the sets P(d) as diameter d tends to 0 ( ) Example. Let us consider the Van-der-Pol system ( )

It is well known that the chain recurrent set of the Van der-Pol system consists of an equilibrium point (0,0) and a periodic orbit. The system has been studied numerically in the square M=[-3,5;3,5]x[-3,5;3,5]. The initial covering consists of 49 cells, which are 1x1 squares. The subsequent subdivisions cells are into 4 equal squares. The picture presents the neighborhoods of the chain recurrent set. According to Theorem these neighborhoods tend to the equilibrium point and the periodic orbit.

A computer program realizing the algorithm described above has been implemented in St. Petersburg Technical University, 1991 by A. Moiseev.

5.7 Stochastic Markov chains, example.

Stochastic Markov chain is defined by a collection of states {i=1, 2, n} and probabilities Pij of transitions from the state i to the state j. The matrix of the transition probabilities

53

( is a stochastic matrix if

for each i. The latter condition means that the probability of transition from state i to some state (possibly the same) is equal to 1. So stochastic Markov chain is a symbolic image with probability of transition over each directed edge i j. In addition, for each state, the sum of the probabilities of all outputs is equal to one. Task. Determine stochastic Markov chain on the given symbolic image.

Stochastic Markov chain can be obtained from a symbolic image. Let

(
be transition matrix of a symbolic image,

if the edge ij exists else By setting we get a stochastic matrix. In this case, all the outputs of the state are equivalent. However, if some passages are more preferred that they should be more probability. Thus, the Markov chain can be viewed as a generalization of the

54

symbolic image. Markov chains are used to study dynamics when we know state of economic system with some probability. Suppose we know that initial state of system is distributed with probability

P0=(P1, P2, , Pn)

to states {1, 2, , n}, . The matrix of the transition probabilities is

During the unit of time, the system switches to a new state that has a distribution of the form

After k units of time the system has a distribution

We obtain a limit distribution when k tends to infinity. The limit distribution is called stationary distribution and it is great importance for the practice. Stationary distribution is determined by the equation

(
Example.

Consider symbolic image with two vertices and transition matrix of the form ( The corresponding stochastic matrix is )

The stationary distribution is ( )

55

Please, check this. Task. Show graph G of the symbolic image described above.

5.8 Balance method for stationary distribution.

Many economic problems are reduced to the study of flows in graphs. Let G be a directed graph. A distribution {mij} on the edges {i j} is called flow on G if

The last property may be treated as a Kirchhoff law: the flow incoming in the vertex i the flow outgoing from i

equals

The second property is normalization. In the graph theory the described distribution is named a closed or invariant flow. We define the probability of the vertex i as

In this case we get

Each flow {mij} on a graph G generates the stochastic Markov chain such that the states {i} are vertices

56

and the transition probability ij is defined as

The constructed stochastic matrix ( has a stationary distribution of the form ( ) )

It turns out that the inverse is true: for any stochastic matrix

and its stationary distribution p=(pi) there exists a flow

(
with the distribution on vertices

It's enough to put

It follows from above that the flow technology on graph is equivalent to the stochastic matrix method. Let G be a graph with n vertices. A matrix {mij} is a flow on G if the following conditions are satisfied:

57

The task on computation of flow on graph may be considered as a specific transport task. Leningrad architect G.V. Sheleikhovsky solved such a task in the fifties of last century using the balance method. Starting from an arbitrary distribution he recalculated the distribution sequentially such that only one equality be satisfied and other ones have escaped the attention. By repeating such balance in cycle he obtained the sequence of distributions which converges rapidly to the desired solution. Example. Consider the graph G

For G a stochastic matrix and stationary distribution are constructed by the Sheleikhovsky method of balance. The original matrix has been the transition matrix of the symbolic image. The stochastic matrix and stationary distribution has the form

(
( Task. Please, check the equality )

58

Solow R. A. Contribution to the theory of economic growth // Quarterly Journal of Economics. 1956. Vol. 70. P. 6594. Takens F. Detecting strange attractor in turbulence. Lect. Notes in Math., 1981. -v.898 -- Berlin: Springer -- 89-94. W.A, BROCK , A.G. MALLIARIS, DIFFERENTIAL EQUATIONS, STABILITY AND CHAOS IN DYNAMIC ECONOMICS . Amsterdam, The Netherlands, 1996. Pierre N.V. Tu, Dynamical Systems. An Introduction with Applications in Economics and Biology, Springer-Verlag, Berlin Heidelberg, 1994. Sargent, Thomas J. Dynamic macroeconomic theory. United States of America Sixth printing, 1997. WEI-BIN ZHANG, Discrete Dynamical Systems, Bifurcations and Chaos in Economics ASIA PASIFIC UNIVERSITY, JAPAN, 2006. Wei-Bin Zhang, Theory of Complex Systems and Economic Dynamics. Nonlinear Dynamics, Psychology, and Life Sciences, Vol. 6, No. 2, April 2002. LAURENCE HARRIS. MONETARY THEORY. MCGRAW-HILL BOOK COMPANY, 1981. Steven Shreve, Stochastic Calculus and Finance, 1997