An Introduction to First-Order Linear Difference Equations With Constant Coefficients

Courtney Brown, Ph.D. Emory University

Definition of a Difference Equation

y(t+1) = ay(t) + b y(t+1) = Some constant of proportionality times y(t) plus some constant. Some interesting cases are

y(t+1) = ay(t) exponential growth y(t+1) = b a horizontal line y(t+1) = y(t) + b a straight sloping line

Relation to Interest

yt+1 = yt + ryt = yt(1+r) r = rate of interest

To Do List for Difference Equations

Plot the equation over time Get an analytical solution for the difference equation if it is available Describe the models behavior Determine the equilibrium values

Equilibrium Values

At equilibrium, y(t+1) = y(t) = y* y* = ay* + b y* - ay* = b y*(1-a) = b y* = b/(1-a) = the equilibrium value

Stability Criteria

y(t) will be stable if |a| < 1 y(t) will be unstable if |a| > 1 y(t) will oscillate if a < 0 y(t) will change monotonically if a > 0 y(t) will converge to a stable equilibrium value if |a| < 1

Analytic Solution: Part I

y1 = ay0 + b y2 = ay1 + b
y2 = a(ay0 + b) + b y2 = a2y0 + ab + b y2 = a2y0 + (a+1)b

y3 = ay2 + b
y3 = a(a2y0 + ab + b) + b y3 = a3y0 + a2b + ab + b y3 = a3y0 + b(a2 + a + 1)

Part II: Proof by Induction Proves That

yn = any0 + b(1 + a + a2 + + an-1), then To find the sum 1 + a + a2 + + an-1 write S = 1 + a + a2 + + an-1 -aS = -(a + a2 + + an-1 + an) S aS = 1 an S(1 a) = 1 an S = (1 an)/(1 a)

Part III: Thus, the solution for yn is

yn = any0 + b(1 an)/(1 a) or, more conveniently, yn = b/(1-a) + [y0 b/(1-a)]an, for a1 We like to write it this way because b/(1-a) is the equilibrium value, y*. If a=1, then go back to yn = any0 + b(1 + a + a2 + + an-1) to obtain yn = y0 + b(n), the solution when a=1

Note: These solutions for the first-order linear difference equation with constant coefficients are used analytically to describe the time paths with words. Computing the time paths with a computer is done using the original equation, y(t+1) = ay(t) + b using programming loops.

a > 1, y0 > b/(1-a)

Increasing, monotonic, unbounded
y(t)

y0 time

a > 1, y0 < b/(1-a)

Decreasing, monotonic, unbounded
y(t) y0

time

0 < a < 1, y0 < b/(1-a)

Increasing, monotonic, bounded, convergent
y(t) y*

y0 time

0 < a < 1, y0 > b/(1-a)

Decreasing, monotonic, bounded, convergent

y(t)

y0

y* time

-1 < a < 0
bounded, oscillatory, convergent
y(t)

y* y0

time

a < -1
unbounded, oscillatory, divergent
y(t)

y* y0

time

a = 1, b = 0
constant
y(t)

y* and y0

time

a = 1, b > 0
constant increasing
y(t)

y0

time

a = 1, b < 0
constant decreasing
y(t) y0

time

a = -1
finite, bounded oscillatory
y(t)

y* y0

time

Rules of Interpretation
|a| > 1 unbounded [repelled from line b/(1-a)] |a| < 1 bounded [attracted or convergent to [b/(1-a)] a < 0 oscillatory a > 0 monotonic a = -1 bounded oscillatory All of this can be deduced from the solution yn = b/(1-a) + [y0 b/(1-a)]an, for a1

Special Cases

a = 1, b = 0 constant a = 1, b > 0 constant increasing a = 1, b < 0 constant decreasing

Words Are Important

The words used to describe the behaviors of the first-order linear difference equation with constant coefficients are used in your text. These behaviors can all be deduced from the algebra of the analytical solution to the equation.