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General Constrained Dynamic (GCD) models with intertemporal utility functions

Author

Listed:
  • Glötzl, Erhard
Abstract
In economics balance identities as e.g. C+K'-Y(L,K)=0 must always apply. Therefore, they are called constraints. This means that variables C,K,L cannot change independently of each other. In general equilibrium theory (GE) the solution for the equilibrium is obtained as an optimisation under the above or similar constraints. The standard method for modelling dynamics in macroeconomics are Dynamic Stochastic General Equilibrium (DSGE) models. Dynamics in DSGE models result from the maximisation of an intertemporal utility function that results in the Euler-Lagrange equations. The Euler-Lagrange equations are differential equations that determine the dynamics of the system. In Glötzl, Glötzl, und Richters (2019) we have introduced an alternative method to model dynamics, which constitutes a natural extension of GE theory. This approach is based on the standard method for modelling dynamics under constraints in physics. We therefore call models of this type "General Constrained Dynamic (GCD)" models. In Glötzl (2022b) this modelling method is described for non-intertemporal utility functions in macroeconomics. Since intertemporal utility functions are, however, essential for many economic models, this paper sets out to extend the GCD modelling framework to intertemporal GCD models, referred to as IGCD models in the following. This paper sets out to define the principles of formulating IGCD models and show how IGCD can be understood as a generalisation and alternative to DSGE models.

Suggested Citation

  • Glötzl, Erhard, 2022. "General Constrained Dynamic (GCD) models with intertemporal utility functions," MPRA Paper 112387, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112387
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    References listed on IDEAS

    as
    1. Oliver Richters & Erhard Glötzl, 2020. "Modeling economic forces, power relations, and stock-flow consistency: a general constrained dynamics approach," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 43(2), pages 281-297, April.
    2. Erhard Glötzl & Florentin Glötzl & Oliver Richters, 2019. "From constrained optimization to constrained dynamics: extending analogies between economics and mechanics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 14(3), pages 623-642, September.
    3. Richters, Oliver, 2021. "Modeling the out-of-equilibrium dynamics of bounded rationality and economic constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 846-866.
    4. Asad Zaman, 2020. "New Directions in Macroeconomics," International Econometric Review (IER), Econometric Research Association, vol. 12(1), pages 1-23, April.
    5. Sylvio Antonio Kappes & Marcelo Milan, 2020. "Dealing with adaptive expectations in Stock-Flow consistent models," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 43(1), pages 76-89, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    macroeconomic models; intertemporal utility function; constraint dynamics; GCD; DSGE; out-of-equilibrium dynamics; Lagrangian mechanics; stock flow consistent; SFC;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology
    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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