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Choice between the discrete and continuous models in economic applications and its implications

Publication at Faculty of Social Sciences |
2005

Abstract

When building a dynamic model we express an impact of past on future state variables. We usually know if the change should be positive or negative and have an idea about a magnitude of the change.

But if we express the change with either a difference or a derivative often depends on such factors, as is ease of evaluation of discrete models. We show that this choice may have important stability implications.

We choose a more general approach and consider the choice not only between discrete and continuous models but among discrete models with various lengths of the step (considering a continuous model be a discrete model with infinitely small step). We derive a closed form formula that says if the equilibrium point in a system with a particular step length is stable or not and some implications about the stability of the same system with different step lengths.

As a special case we get a relationship between stability of a discrete model and the corresponding continuous model where a difference was substituted by a derivative.