Stability and the structure of continuous-time economic models

In this paper we investigate the relationship between the stability of macroeconomic, or macroeconometric, continuous-time models and the structure of the matrices appearing in these models. In particular, we concentrate on dominant-diagonal structures. We derive general stability results for models with first-order as well as second-order adjustment lags. Recalling that many existing macroeconometric models are 'marginally' unstable, we apply our results to a well-known prototype model, i.e. the model of the United Kingdom of Bergstrom and Wymer. Our analysis explains, in terms of the structure of the matrices involved, why this model is marginally unstable.