Homoclinic and Heteroclinic Bifurcations in an Overlapping Generations Model with Credit Market Imperfection

We analyze a nonlinear OLG model with credit market imperfection and endogenous labor supply. When the investors’ protection is perfect, the model reduces to the standard one sector growth model proposed by Reichlin (JET 40:89–102, 1986), while the model reduces to the one studied by Matsuyama (Econometrica 72:853–884, 2004) when the agents’ labor supply is exogenous. Our goal is to highlight that the local analysis of the perfect foresight equilibrium may lead to misleading conclusions because the local analysis neglects the occurrence of different global bifurcation scenarios. In particular, the existence of a heteroclinic connection or the occurrence of a homoclinic bifurcation may be associated with global indeterminacy even when all steady states are locally determinate.