What Can Abrupt Events Tell Us About Sustainability ?

Abstract

This paper aims to analyze the overlooked link between abrupt events and sustainability, through limit cycle analysis. We use the well known Calvo and Obstfeld (1988) framework in order to distinguish individual's and social planner's discount rate and show that individual discount rate could lead to a Hopf bifurcation, only if the economy is exposed to abrupt event risk. This result is in contrast with the literature which shows that individual discount rate does not have any effect on the optimum trajectory of aggregate consumption. More importantly, the existence of limit cycles implies that consumption and natural resource stock are exposed to cycles at the long run, meaning that the path of utility does not conform with the prominent Sustainable Development criterion. Lastly, we analyze the economic reasons behind limit cycles and show that protecting the environment makes limit cycles less likely to occur