Preface

This is the fourth edition of a book that, after circulating in the form of lecture notes at the universities of Rome (now La Sapienza University of Rome) and
Siena in the late 1960s, was originally published in 1971 under the title Mathematical Methods and Models in Economic Dynamics. In those forty odd years two
main developments have occurred in economic dynamics. The first is the much
greater amount of advanced mathematics that is being used today with respect
to the past. The second is the increasing importance of non-linear modelling as
contrasted with the linear approach (which, however, has not gone out of fashion).
This fourth edition reflects both developments. It contains additional advanced
mathematical tools, and a larger amount of non-linear mathematics and applications. These developments are reflected especially in Part III, that now accounts
for well over 50% of the book. It goes without saying that I have made every effort
to preserve the user-friendly feature of the previous editions: the spirit of the book
has remained the same, namely to give a comprehensive, but simple, treatment of
the mathematical methods commonly used in dynamical economics, and to show
how they are applied to build and analyse economic models.
Accordingly, the focus is on methods, and every mathematical technique introduced is followed by its application to selected economic models that serve as
examples. The unifying principle in the exposition of the different economic models is then seen to be the common mathematical technique. This process will
enable the readers not only to understand the basic literature, but also to build
and analyse their own models.
Comprehensive means that this book contains an unusually broad set of mathematical methods. The standard constant-coefficient linear difference and differential equations and simultaneous systems are of course thoroughly explained,
starting from scratch up to the matrix solution (including the Jordan canonical
form). Mixed differential-difference equations are introduced by a discussion of
discrete and continuous time in economic modelling. An extensive treatment of
non-linear dynamic equations and qualitative methods (from phase diagrams to
non-linear oscillations and bifurcation theory, including hysteresis in dynamic systems and singularity-induced bifurcations) is given. The saddle-path properties of
solutions to dynamic optimization problems and to rational expectations models
with jump variables are explained in detail, and indeterminacy phenomena are
examined. Stability considerations are stressed throughout, including advanced
topics such as Liapunovs second method, structural stability, conditional stability, and so on. The theory of chaotic dynamics is treated at some length and

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Preface

appraised in relation to stochastic erraticity, and the problem of chaos control is

examined. Synergetics and catastrophe theory are also treated. A completely new
chapter on dynamic optimization has been added, that covers all the standard
methods (calculus of variations, Pontryagins maximum principle, and Bellmans
dynamic programming).
Simple means that the lowest possible level of mathematical prerequisites is
presupposed in the reader. He or she is assumed to have no previous familiarity
with the topics treated. Accordingly, every subject is worked out in great detail,
and no essential step in the argument is omitted. The reader is guided through
a step-by-step analysis of each topic, be it a mathematical method or an economic model. This user-friendly feature, which is also present in the exercises, will
undoubtedly be appreciated by students.
The required background for Part I consists of elementary algebra, for Part
II of the rudiments of calculus. Advanced matrix algebra is used when necessary, but the main propositions can be understood without it. More mathematical
background is needed for Part III; however, this does not go much beyond the
knowledge acquired in any basic course of mathematics for economists. It should
also be pointed out that the organisation of Part III is different from that of Parts I
and II, where mathematical methods and illustrative economic models are treated
in separate chapters. This separation is didactically convenient when the mathematical chapter deals with a specific and limited topic, e.g., difference equations
of a given order, linear and with constant coefficients. Since each chapter of Part
III usually has a much broader mathematical subject matterbifurcation theory,
for examplethe economic illustrations are more conveniently presented with the
mathematical methods. An exception is the chapter on dynamic optimization,
which is exclusively mathematical (the economic applications are treated in a subsequent chapter). The reason is that in this case treating methods and economic
applications together would have given rise to an unduly long chapter.

This book has been written for economists, but applied mathematicians interested in getting a birds eye view of the economic applications of the mathematical
methods under consideration may find the economic parts of the book useful. In
fact, although the main selection criterion has been the models suitability to illustrate the mathematical point, both old classics and recent research results have
been included, as well as both microeconomic and macroeconomic models. Also,
students in time series analysis who need a grounding in difference equations will
find Part I useful.
***
I am grateful to the students from all over the world who have written me
over the decades to indicate unclear points and misprints, and to (the late) Flavio
Casprini, Riccardo Cesari, Nicola Cetorelli, Vivek H. Dehejia, Olivier de La Grandville, Lisbeth Fajstrup, Maria Maddalena Giannetti, Claude Hillinger, Michael D.
Intriligator, Giovanna Paladino, Maria Luisa Petit, Luca Ricci, Francesca Sanna
Randaccio, Karlhans Sauernheimer, Federico Trionfetti, for their advice and comments on previous editions. Marianna Belloc, Giuseppe De Arcangelis, Daniela

Preface

IX

Federici, Alessandro Flamini, Enrico Saltari read and commented on the new material.
I am particularly indebted to William A. Barnett, who (in a review article of the
third edition) suggested the inclusion of several new topics and the reorganisation
of others (most of his suggestions have been accepted in this fourth edition), to
Serena Sordi, who spotted several misprints and suggested many improvements,
and to Qinglai Meng, who suggested a correction to my treatment of the stability
conditions for third-order difference equations. Finally, I would like to thank the
Sapienza University of Rome for generous support in terms of research funds and
a year of sabbatical leave. None of the persons and institutions mentioned has any
responsibility for possible deficiencies that might remain.
Giancarlo Gandolfo, Sapienza University of Rome, June 2009

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