Deterministic randomness in a model of finance and growth

Following the literature on growth, cycles and financial development, this paper develops an economic growth model in which the source of endogenous business cycles relates to the allocation of credit between productive investment and consumption. An important role is given to consumer sentiment, because this determines the demand of households for credit; in particular, optimistic beliefs about the economy’s macro performance divert financial resources from investment in favor of consumption. The dynamic analysis indicates that Neimark–Sacker and flip bifurcations eventually separate stable and unstable manifolds and, as a result, a region of nonlinear motion is generated: cycles of various periodicities and chaotic motion characterize the behavior of the long run time paths of accumulated wealth, output and consumption.