RIEB Discussion Paper Series No.2026-07

Title

Steady States with Giffen Goods in the Dynamic Two-Sector Model

Abstract

This paper examines the relationship between dynamic stability and the presence of Giffen goods in a standard two-sector growth model. We show that a steady state may take the form of a saddle point even when a labor-intensive good becomes a Giffen good at the steady state.The results highlight that the stability of equilibria is shaped not by the presence of Giffen behavior per se, but by the strength of the income effect associated with inferior goods. When this effect is suffciently large, steady states can become unstable; otherwise, stability is preserved. These findings clarify the conditions under which Giffen behavior interacts with dynamic equilibria, and emphasize the central role of income elasticity in determining stability outcomes.

Keywords

Giffen goods; Dynamic stability; Two-sector model; Income elasticity

JEL Classification

D11, E13, E21

Inquiries

Kazumichi IWASA
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059

Kazuo NISHIMURA
Research Institute for Economics and Business Administration
Center for Computational Social Science
Kobe University