Research Article | Open Access
A Dynamic Economic Model with Discrete Time and Consumer Sentiment
The paper describes a dynamical economic model with discrete time and consumer sentiment in the deterministic and stochastic cases. We seek to demonstrate that consumer sentiment may create fluctuations in the economical activities. The model possesses a flip bifurcation and a Neimark-Sacker bifurcation, after which the stable state is replaced by a (quasi) periodic motion. We associate the difference stochastic equation to the model by randomizing the control parameter and by adding one stochastic control. Numerical simulations are made for the deterministic and stochastic models, for different values of the control parameter .
The economic empirical evidence [1–3] suggests that consumer sentiment influences household expenditure and thus confirms Keynes' assumption that consumer “attitudes” and "animalic spirit" may cause fluctuations in the economic activity. On the other hand, Dobrescu and Opris [4, 5] analyzed the bifurcation aspects in a discrete-delay Kaldor model of business cycle, which corresponds to a system of equations with discrete time and delay. Following these studies, we develop a dynamic economic model in which the agents' consumption expenditures depend on their sentiment. As particular cases, the model contains the Hick-Samulson , Puu , and Keynes  models as well as the model from . The model possesses a flip and Neimark-Sacker bifurcation, if the autonomous consumption is variable.
The implications of the stochastic noise on the economic process are studied. The stochastic difference equation with noise terms is scaled appropriately to account for intrinsic as well as extrinsic fluctuations. Under the influence of noise the difference equation behaves qualitatively different compared to its deterministic counterpart.
The paper is organized as follows. In Section 2, we describe the dynamic model with discrete time using investment, consumption, sentiment, and saving functions. For different values of the model parameters we obtain well-known dynamic models (Hick-Samuelson, Keynes, Pu). In Section 3, we analyze the behavior of the dynamic system in the fixed point's neighborhood for the associated map. We establish asymptotic stability conditions for the flip and Neimark-Sacker bifurcations. In both the cases of flip and Neimark-Sacker bifurcations, the normal forms are described in Section 4. Using the QR method, the algorithm for determining the Lyapunov exponents is presented in Section 5. In Section 6, a stochastic model with multiplicative noise is associated to the deterministic model. These equations are obtained by randomizing one parameter of the deterministic equation or by adding one stochastic control. Finally, the numerical simulations are done for the deterministic and stochastic equations. The obtained simulations show major changes between the deterministic and stochastic cases. The analysis of the present model proves its complexity and allows the description of the different scenarios which depend on autonomous consumption.
2. The Mathematical Model with Discrete Time and Consumer Sentiment
Let , be the income at time step and let(1)the investment function , be given by (2)the consumption function , be given by where is the sentiment function given by (3)the saving function , be given by The mathematical model is described by the relation:
The parameters from (2.6) have the following economic interpretations. The parameter represents the autonomous expenditures. The parameter is the control, , and it characterizes a part of the difference between the incomes obtained at two time steps and , which is used for consumption or saving in the time step . The parameter , , is the trend towards consumption. The parameter , , is the trend towards the saving. The parameter , , represents the consumer's reaction against the increase or decrease of his income. When the income (strongly) decreases, the consumer becomes pessimistic and consumes of his income. When the income (strongly) increases, the consumer becomes optimistic and consumes of his income. Note that Souleles  finds, in fact, that higher consumer confidence is correlated with less saving and increases in relation to expected future resources. The parameters and , , describe the investment function. If , the investment function is linear. The parameter , , describes a family of the sentiment functions.
For different values of the model parameters, we obtain the following classical models:()for from (2.6) we obtain the Hick-Samuelson model : ()for , (2.6) gives us the Keynes model : ()for , (2.6) leads to the model from : ()for , from (2.6) we get the Puu model :
3. The Dynamic Behavior of the Model (2.6)
(i) If then, for the map (3.1), the fixed point with the positive components is , where
(ii) The Jacobi matrix of the map in is given by where: , ,
(iii) The characteristic equation of matrix is given by
(iv) If the model parameters satisfy the following inequality: then, for (3.6), the roots have the modulus less than 1, if and only if , where
(v) If the model parameters , , , , , satisfy the inequality (3.7) and , then, one of equation (3.6)'s roots is 1, while the other one has the modulus less than 1.
(vi) If the model parameters satisfy the inequality (3.7) and , then, (3.6) has the roots , where .
Using  and Proposition 3.1, with respect to parameter , the asymptotic stability conditions of the fixed point, the conditions for the existence of the flip and Neimark-Sacker bifurcations are presented in the following.
(i) If the inequality (3.7) holds and , then for the fixed point is asymptotically stable. If , the inequality (3.7) holds, and , then for the fixed point is asymptotically stable.
(ii) If the inequality (3.7) holds, and , then is a flip bifurcation and is a Neimark-Sacker bifurcation.
(iii) If the inequality (3.7) holds and , then is a Neimark-Sacker bifurcation.
4. The Normal Form for Flip and Neimark-Sacker Bifurcations
In this section, we describe the normal form in the neighborhood of the fixed point , for the cases and .
We develop the function in the Taylor series until the third order and obtain where is given by (3.4) and
(i) The eigenvector given by , has the components:
(ii) The eigenvector given by , has the components:
The relation holds.
(iii) The normal form of the map (3.1) on the center manifold in is given by where
The proof results from straight calculus using the formula (2.6):
(i) The eigenvector given by where is the eigenvalue of the matrix , has the components:
(ii) The eigenvector given by where has the components:
The relation holds.
We denoted by where , is given by (3.4), and
(i) The solution of the system (2.6) in the neighborhood of the fixed point is given by
where is the solution of the following equation:
(ii) A complex variable transformation exists so that (4.18) becomes where is the Lyapunov coefficient.
(iii) If , where then in the neighborhood of the fixed point there is a stable limit cycle.
5. The Lyapunov Exponents
If , then for or the system (2.6) has a complex behavior and it can be established by computing the Lyapunov exponents. We will use the decomposed Jacobi matrix of map (3.1) into a product of an orthogonal matrix Q and an uppertriangular matrix R with positive diagonal elements (called QR algorithm ). The determination of the Lyapunov exponents can be obtained by solving the following system: with The Lyapunov exponents are If one of the two exponents is positive, the system has a chaotic behavior.
6. The Stochastic Difference Equation Associated to Difference Equation (2.6)
Let be a filtered probability space with stochastic basis and the filtration . Let be a real valued independent random variable on with and .
The stochastic difference equation associated to the difference equation (2.6) is given by The function is the contribution of the fluctuations while it is under certain circumstances it is given by or From (6.1) and (6.2) the difference equation with multiplicative noise associated to the difference equation (2.6) is given by where is the fixed point of map (2.6).
In what follows, we calculate an estimation of the upper (forward 2 th moment) stability exponent (given in ) for the stochastic process
The upper (forward 2 th moment) stability exponent of the stochastic process is defined by  provided that this limit exists.
Proposition 6.1. Let be the process which satisfies the stochastic difference equation (6.6) with . Assume that, , , where , , are finite, deterministic, real numbers. Then with .
If the parameters of the model are , , , , , , , , , and , then for , , , the inequalities (6.9) are satisfied and .
A similar result can be obtained for (6.5).
7. Numerical Simulation
The numerical simulation is done using a Maple 13 program. We consider different values for the parameters which are used in the real economic processes. We use Box-Muller method for the numerical simulation of (6.4).
For system (6.4) with , , , , , , , and the control parameter we obtain in Figure 1 the evolution of the income in the time domain , in Figure 2 the evolution of the income in the phase space , in Figure 3 the evolution of the income in the stochastic case, and in Figure 4 the evolution of the income in the phase space in the stochastic case. In the deterministic case the Lyapunov exponent is negative and the system has not a chaotic behavior.
For the control parameter Figure 5 displays the evolution of the income in the time domain , Figure 6 the evolution of the income in the phase space , Figure 7 the evolution of the income in the stochastic case, Figure 8 the evolution of the income in the phase space in the stochastic case, and Figure 9 shows the Lyapunov exponent .
The Lyapunov exponent is positive, therefore the system has a chaotic behavior.
For the control parameter , Figure 10 shows the evolution of the income in the time domain , Figure 11 the evolution of the income in the phase space , Figure 12 the evolution of the income in the stochastic case, Figure 13 the evolution of the income in the phase space in the stochastic case, and Figure 14 shows the Lyapunov exponent .
The Lyapunov exponent is positive; therefore the system has a chaotic behavior.
Considering as parameter, we can obtain a Neimark-Sacker bifurcation point or a flip bifurcation point.
A dynamic model with discrete time using investment, consumption, sentiment, and saving functions has been studied. The behavior of the dynamic system in the fixed point's neighborhood for the associated map has been analyzed. We have established asymptotic stability conditions for the flip and Neimark-Sacker bifurcations. The QR method is used for determining the Lyapunov exponents and they allows us to decide whether the system has a complex behavior. Also, two stochastic models with multiplicative noise have been associated to the deterministic model. One model was obtained by adding one stochastic control and the other by randomizing the control parameter . Using a program in Maple 13, we display the Lyapunov exponent and the evolution of the income in the time domain and the phase space, in both deterministic and stochastic cases. A qualitative analysis of the stochastic models will be done in our next papers.
The authors are grateful to Akio Matsumoto and the anonymous referee for their constructive remarks. The research was supported by the Grant with the title “The qualitative analysis and numerical simulation for some economic models which contain evasion and corruption,” The National University Research Council from Ministry of Education and Research of Romania (Grant no. 520/2009).
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Copyright © 2009 L. I. Dobrescu et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.