The Local Bifurcation of Ramsey Equilibrium

The hypothesis that aggregate fluctuations may represent an endogenous feature of dynamic competitive economies with incomplete markets has been advanced in several papers.1 The role of incomplete markets seems essential for the appearance of cycles in one sector models.2 Becker and Foias (1987) and Woodford (1988a) have pointed out that the elasticity of substitution of the production function plays a fundamental role in the existence of cyclic equilibrium paths. In those papers cycles are generated if the substitutability between capital and labor is not too great. Heterogeneity of households is also a crucial component of their fluctuation theories.