JOURNAL OF ECONOMIC THEORY 4, 77-88 (1986) Deficits and Cycles*

This paper shows that periodic equilibria may arise in a simple overlapping generations model with capital. If the government follows a policy of fixing the value of the deficit, rather than fixing the value of government debt, then the dif-ference equation that describes competitive equilibria may posses complex roots in the neighborhood of the golden rule stationary state. One may show that if there exist parametric families of economies for which these roots change stability then, locally, there exists an invariant closed curve. The paper provides two simple exam-ples that generate such equilibria, and it solves these examples numerically. Journa