Complicated endogenous business cycles under gross substitutability

In this paper we investigate the global behaviour of the output equilibrium time paths in a two-dimensional overlapping generations model with productive investment and capital accumulation, where agents behave rationally and markets are competitive. We show that equilibrium time paths can converge to complicated (chaotic) attractors as well as periodic attractors when the substitution effect dominates the income effect everywhere. The occurrence of complicated equilibrium paths is guaranteed by homoclinic inter sections of the stable and unstable manifolds of the autarkic steady state. (C) 1996 Academic Press, Inc