21. Dynamics in One Dimension

21.1. Overview

In this lecture we give a quick introduction to discrete time dynamics in one dimension.

In one-dimensional models, the state of the system is described by a single variable.

Although most interesting dynamic models have two or more state variables, the one-dimensional setting is a good place to learn the foundations of dynamics and build intuition.

We’ll use the following packages:

using LaTeXStrings, LinearAlgebra, Plots

21.2. Some Definitions

This section sets out the objects of interest and the kinds of properties we study.

21.2.1. Difference Equations

A time homogeneous first order difference equation is an equation of the form

(21.1)\[x_{t+1} = g(x_t)\]

where \(g\) is a function from some subset \(S\) of \(\mathbb R\) to itself.

Here \(S\) is called the state space and \(x\) is called the state variable.

In the definition,

  • time homogeneity means that \(g\) is the same at each time \(t\)

  • first order means dependence on only one lag (i.e., earlier states such as \(x_{t-1}\) do not enter into (21.1)).

If \(x_0 \in S\) is given, then (21.1) recursively defines the sequence

(21.2)\[x_0, \quad x_1 = g(x_0), \quad x_2 = g(x_1) = g(g(x_0)), \quad \text{etc.}\]

This sequence is called the trajectory of \(x_0\) under \(g\).

If we define \(g^n\) to be \(n\) compositions of \(g\) with itself, then we can write the trajectory more simply as \(x_t = g^t(x_0)\) for \(t \geq 0\).

21.2.2. Example: A Linear Model

One simple example is the linear difference equation

\[ x_{t+1} = a x_t + b, \qquad S = \mathbb R \]

where \(a, b\) are fixed constants.

In this case, given \(x_0\), the trajectory (21.2) is

(21.3)\[x_0, \quad a x_0 + b, \quad a^2 x_0 + a b + b, \quad \text{etc.}\]

Continuing in this way, and using our knowledge of geometric series, we find that, for any \(t \geq 0\),

(21.4)\[x_t = a^t x_0 + b \frac{1 - a^t}{1 - a}\]

This is about all we need to know about the linear model.

We have an exact expression for \(x_t\) for all \(t\) and hence a full understanding of the dynamics.

Notice in particular that \(|a| < 1\), then, by (21.4), we have

(21.5)\[x_t \to \frac{b}{1 - a} \text{ as } t \to \infty\]

regardless of \(x_0\)

This is an example of what is called global stability, a topic we return to below.

21.2.3. Example: A Nonlinear Model

In the linear example above, we obtained an exact analytical expression for \(x_t\) in terms of arbitrary \(t\) and \(x_0\).

This made analysis of dynamics very easy.

When models are nonlinear, however, the situation can be quite different.

For example, consider the law of motion for the Solow growth model, a simplified version of which is

(21.6)\[k_{t+1} = s z k_t^{\alpha} + (1 - \delta) k_t\]

Here \(k\) is capital stock and \(s, z, \alpha, \delta\) are positive parameters with \(0 < \alpha, \delta < 1\).

If you try to iterate like we did in (21.3), you will find that the algebra gets messy quickly.

Analyzing the dynamics of this model requires a different method (see below).

21.2.4. Stability

A steady state of the difference equation \(x_{t+1} = g(x_t)\) is a point \(x^*\) in \(S\) such that \(x^* = g(x^*)\).

In other words, \(x^*\) is a fixed point of the function \(g\) in \(S\).

For example, for the linear model \(x_{t+1} = a x_t + b\), you can use the definition to check that

  • \(x^* := b/(1-a)\) is a steady state whenever \(a \not= 1\).

  • if \(a = 1\) and \(b=0\), then every \(x \in \mathbb R\) is a steady state.

  • if \(a = 1\) and \(b \not= 0\), then the linear model has no steady state in \(\mathbb R\).

A steady state \(x^*\) of \(x_{t+1} = g(x_t)\) is called globally stable if, for all \(x_0 \in S\),

\[ x_t = g^t(x_0) \to x^* \text{ as } t \to \infty \]

For example, in the linear model \(x_{t+1} = a x_t + b\) with \(a \not= 1\), the steady state \(x^*\)

  • is globally stable if \(|a| < 1\) and

  • fails to be globally stable otherwise.

This follows directly from (21.4).

A steady state \(x^*\) of \(x_{t+1} = g(x_t)\) is called locally stable if there exists an \(\epsilon > 0\) such that

\[ | x_0 - x^* | < \epsilon \; \implies \; x_t = g^t(x_0) \to x^* \text{ as } t \to \infty \]

Obviously every globally stable steady state is also locally stable.

We will see examples below where the converse is not true.

21.3. Graphical Analysis

As we saw above, analyzing the dynamics for nonlinear models is nontrivial.

There is no single way to tackle all nonlinear models.

However, there is one technique for one-dimensional models that provides a great deal of intuition.

This is a graphical approach based on 45 degree diagrams.

Let’s look at an example: the Solow model with dynamics given in (21.6).

We begin with some plotting code that you can ignore at first reading.

The function of the code is to produce 45 degree diagrams and time series plots.

function plot45(f, xmin, xmax, x0; num_arrows=6)
    x = x0
    xgrid = range(xmin, xmax, 200)
    xticks = zeros(num_arrows+1)
    arrow_kwargs = (arrow=:closed, linecolor=:black, alpha=0.5)
    dash_kwargs = (linestyle=:dash, linecolor=:black, alpha=0.5)
    plt = plot(xgrid, xgrid, xlim=(xmin, xmax), ylim=(xmin, xmax), linecolor=:black, lw=2)
    plot!(plt, xgrid, f.(xgrid), linecolor=:blue, lw=2)
    arrow_iterator = 0:(num_arrows-1)
    for (i, j) in enumerate(arrow_iterator)
        xticks[i] = x
        if i == 1
            plot!([x, x], [0, f(x)]; arrow_kwargs...)
            plot!([x, f(x)], [f(x), f(x)]; arrow_kwargs...)
        else
            plot!([x, x], [x, f(x)]; arrow_kwargs...)
            plot!([x, x], [0, x]; dash_kwargs...)
            plot!([x, f(x)], [f(x), f(x)]; arrow_kwargs...)
        end
        x = f(x)
        plot!([x, x], [0, x], xticks=(xticks, [L"k_%$j" for j in 0:num_arrows]), yticks=(xticks, [L"k_%$j" for j in 0:num_arrows]); dash_kwargs...)
    end
    xticks[num_arrows+1] = x
    plot!([x, x], [0, x], legend=false; dash_kwargs...)
    hline!([0], color=:green, lw=2)
    vline!([0], color=:green, lw=2)
end  

function ts_plot(f, xmin, xmax, x0; ts_length=6)
    x = zeros(ts_length)
    x[1] = x0
    for t in 1:(ts_length-1)
        x[t+1] = f(x[t])
    end
    plot(1:ts_length, x, ylim=(xmin, xmax), linecolor=:blue, lw=2, alpha=0.7)
    scatter!(x, mc=:blue, alpha=0.7, legend=false)
end
ts_plot (generic function with 1 method)

Let’s create a 45 degree diagram for the Solow model with a fixed set of parameters

p = (A=2, s=0.3, α=0.3, δ=0.4, xmin=0, xmax=4)
(A = 2, s = 0.3, α = 0.3, δ = 0.4, xmin = 0, xmax = 4)

Here’s the update function corresponding to the model.

g(k; p) = p.A * p.s * k^p.α + (1 - p.δ) * k
g (generic function with 1 method)

Here is the 45 degree plot.

plot45(k -> g(k; p), p.xmin, p.xmax, 0, num_arrows=0)
../_images/scalar_dynam_9_0.svg

The plot shows the function \(g\) and the 45 degree line.

Think of \(k_t\) as a value on the horizontal axis.

To calculate \(k_{t+1}\), we can use the graph of \(g\) to see its value on the vertical axis.

Clearly,

  • If \(g\) lies above the 45 degree line at this point, then we have \(k_{t+1} > k_t\).

  • If \(g\) lies below the 45 degree line at this point, then we have \(k_{t+1} < k_t\).

  • If \(g\) hits the 45 degree line at this point, then we have \(k_{t+1} = k_t\), so \(k_t\) is a steady state.

For the Solow model, there are two steady states when \(S = \mathbb R_+ = [0, \infty)\).

  • the origin \(k=0\)

  • the unique positive number such that \(k = s z k^{\alpha} + (1 - \delta) k\).

By using some algebra, we can show that in the second case, the steady state is

\[ k^* = \left( \frac{sz}{\delta} \right)^{1/(1-\alpha)} \]

21.3.1. Trajectories

By the preceding discussion, in regions where \(g\) lies above the 45 degree line, we know that the trajectory is increasing.

The next figure traces out a trajectory in such a region so we can see this more clearly.

The initial condition is \(k_0 = 0.25\).

k0 = 0.25
plot45(k -> g(k; p), p.xmin, p.xmax, k0, num_arrows=5)
../_images/scalar_dynam_11_0.svg

We can plot the time series of capital corresponding to the figure above as follows:

ts_plot(k -> g(k; p), p.xmin, p.xmax, k0)
../_images/scalar_dynam_13_0.svg

Here’s a somewhat longer view:

ts_plot(k -> g(k; p), p.xmin, p.xmax, k0, ts_length=20)
../_images/scalar_dynam_15_0.svg

When capital stock is higher than the unique positive steady state, we see that it declines:

k0 = 2.95
plot45(k -> g(k; p), p.xmin, p.xmax, k0, num_arrows=5)
../_images/scalar_dynam_17_0.svg

Here is the time series:

ts_plot(k -> g(k; p), p.xmin, p.xmax, k0)
../_images/scalar_dynam_19_0.svg

21.3.2. Complex Dynamics

The Solow model is nonlinear but still generates very regular dynamics.

One model that generates irregular dynamics is the quadratic map

\[ g(x) = 4 x (1 - x), \qquad x \in [0, 1] \]

Let’s have a look at the 45 degree diagram.

xmin, xmax = 0, 1
g(k) = 4 * k * (1 - k)
x0 = 0.3
plot45(g, xmin, xmax, 0, num_arrows=0)
../_images/scalar_dynam_21_0.svg

Now let’s look at a typical trajectory.

plot45(g, xmin, xmax, x0, num_arrows=6)
../_images/scalar_dynam_23_0.svg

Notice how irregular it is.

Here is the corresponding time series plot.

ts_plot(g, xmin, xmax, x0)
../_images/scalar_dynam_25_0.svg

The irregularity is even clearer over a longer time horizon:

ts_plot(g, xmin, xmax, x0, ts_length=20)
../_images/scalar_dynam_27_0.svg

21.4. Exercises

21.4.1. Exercise 1

Consider again the linear model \(x_{t+1} = a x_t + b\) with \(a \not=1\).

The unique steady state is \(b / (1 - a)\).

The steady state is globally stable if \(|a| < 1\).

Try to illustrate this graphically by looking at a range of initial conditions.

What differences do you notice in the cases \(a \in (-1, 0)\) and \(a \in (0, 1)\)?

Use \(a=0.5\) and then \(a=-0.5\) and study the trajectories

Set \(b=1\) throughout.

21.5. Solutions

21.5.1. Exercise 1

We will start with the case \(a=0.5\).

Let’s set up the model and plotting region:

q = (a = 0.5, b = 1, xmin = -1, xmax = 3)
g(k; q) = q.a * k + q.b
g (generic function with 1 method)

Now let’s plot a trajectory:

x0 = -0.5
plot45(k -> g(k; q), q.xmin, q.xmax, x0, num_arrows=5)
../_images/scalar_dynam_31_0.svg

Here is the corresponding time series, which converges towards the steady state.

ts_plot(k -> g(k; q), q.xmin, q.xmax, x0, ts_length=10)
../_images/scalar_dynam_33_0.svg

Now let’s try \(a=-0.5\) and see what differences we observe.

Let’s set up the model and plotting region:

r = (a = -0.5, b = 1, xmin = -1, xmax = 3)
g(k; r) = r.a * k + r.b
g (generic function with 1 method)

Now let’s plot a trajectory:

x0 = -0.5
plot45(k -> g(k; r), r.xmin, r.xmax, x0, num_arrows=5)
../_images/scalar_dynam_37_0.svg

Here is the corresponding time series, which converges towards the steady state.

ts_plot(k -> g(k; r), r.xmin, r.xmax, x0, ts_length=10)
../_images/scalar_dynam_39_0.svg

Once again, we have convergence to the steady state but the nature of convergence differs.

In particular, the time series jumps from above the steady state to below it and back again.

In the current context, the series is said to exhibit damped oscillations.