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Chapter 2

Dierence Equations: General


Principles
2.1

Denitions

Given a function | = i (w), its rst dierence is dened as the dierence


between the value of the function when the argument assumes the value
w + k, (k A 0), and the value of the function corresponding to the value w of
the argument. In symbols, | = i(w + k)  i(w)= It should be noted that it is
unimportant whether the values run forwards or backwards, namely we could
as well dene the rst dierence of the function as | = i (w)  i (w  k)=
Without loss of generality we can assume unit increments of the dependent variable, i.e. | = i (w + 1)  i (w), or | = i (w)  i(w  1)= From now
on we shall conventionally use forward-running values of w.
If we consider successive equally-spaced values of the independent variable
(w + 1> w + 2> w + 3> etc.), we can obtain successive rst dierences:
= i(w + 1)  i (w)
= |wn  |w >
|w
|wn = i(w + 2)  i (w + 1) = |wn2  |wn >
|wn2 = i(w + 3)  i (w + 2) = |wn  |wn2 >
and so on. We can then compute the second dierences, i.e. the sequence of
dierences between two successive rst dierences:
2 |w

= |wn  |w = (|wn2  |wn )  (|wn  |w ) = |wn2  2|wn + |w >

2 |wn = |wn2  |wn = |wn  2|wn2 + |wn >


2 |wn2 = |wn  |wn2 = |wne  2|wn + |wn2 >
and so on. Note that the superscript 2 means that the operation of computing
the dierence has been repeated twice, i.e. that the dierence operator
has been applied twice.
G. Gandolfo, Economic Dynamics,
Springer-Verlag Berlin Heidelberg 2009

10

Chapter 2. Dierence Equations: General Principles

Proceeding similarly we can compute the dierences between two successive second dierences and obtain the third dierences of the function:
|w

= 2 |wn  2 |w = (|wn2  |wn )  (|wn  |w )


= |wn2  2|wn + |w
= (|wn  |wn2 )  2(|wn2  |wn ) + (|wn  |w )
= |wn  3|wn2 + 3|wn  |w >

|wn = 2 |wn2  2 |wn = |wne  3|wn + 3|wn2  |wn >


and so on. Higher-order dierences can be computed by the reader as an
exercise.
We can now dene an ordinary dierence equation as a functional equation involving one or more of the dierences |, 2 |> etc., of an unknown
function of time. Since the argument w varies in a discontinuous way, taking
on equally-spaced values, it follows that our unknown function will be dened
only corresponding to these values of w (i.e. the graph of the function will be
a succession of separate points, as we shall see in detail in Chap. 3).
We have called this equation ordinary because the unknown function is
a function of only one argument. When the partial dierences of a function
having more than one argument are involved, the equation becomes a partial
dierence equation, a type of dierence equation that will not be treated in
this book.
The order of a dierence equation is that of the highest dierence appearing in the equation. If, for example, the highest dierence contained is the
third dierence, the equation is of the third order; note that the equation is
of the third order independently of the fact that the lower-order dierences
are or are not contained in the equation.
Since the dierences of any order can be expressed, as we have seen above,
in terms of values of the function at dierent points of time, a dierence
equation may also be dened as a functional equation involving two or more
of the values |w > |wn > etc., of an unknown function of time. For example,
the dierence equation d|w + e|w = 0 transforms, if we substitute |w =
|wn  |w , into d|wn + (e  d)|w = 0= In this form, the order of the equation is
given by the highest dierence between time subscripts: if the equation, for
example, contains |wn > |wn and |w , it is of the third order. We shall consider
the dierence equation expressed in this second form as it is the form they
commonly take in economic models.
Let us note again that it makes no dierence whether the equally spaced
values of w are computed forwards or backwards, so long as the structure
of the time lags remains unaltered. The equation d|wn + (e  d)|w = 0> for
example, is identical with the equation d|w +(ed)|w3 = 0= The reason is that
to solve the dierence equation means, as we know from the Introduction,
to nd a function (or functions) which satises (satisfy) the equation for any
admissible value of w= This allows us to shift all the time subscript as we

2.2. Linear dierence equations with constant coecients

11

like, provided that they are all shifted by the same amount (neglecting this
proviso would alter the structure of the equation).
Consider now the equation |w = d> i.e. |wn  |w = d= In words, the
problem is: nd a function such that its rst dierence equals the given
constant d for any value of w= It can be checked that the linear function
| = dw + e satises the equation, since
|wn  |w = [d(w + 1) + e]  (dw + e) = d=
Note that in the solution function an arbitrary constant (e) appears. This
is not surprising, since the constancy of rst dierences is not aected by a
parallel shift of the straight line. More generally, in the operation of dierencing, the presence of an arbitrary constant, that is eliminated in the course
of the operation, does not alter the result. Therefore, an arbitrary constant
always appears in the solution of a rst-order dierence equation, and no
more than one can appear.
Proceeding further, consider the equation 2 |w = 0 (nd a function such
that its second dierence equals zero for any value w). The solution is always the linear function | = dw + e, but now both d and e are arbitrary
constants; in fact, any straight line has a zero second dierence. In general,
the computation of second dierence eliminates in succession two (and only
two) arbitrary constants.
We shall see later on how the arbitrary constant(s) can be determined
through additional conditions; what interests us here is to note that we can
induce, from the reasoning above, the following important theorem:
Theorem 2=1 The general solution of a dierence equation of order n is
a function of t involving exactly n arbitrary constants.

2.2

Linear dierence equations with constant


coecients

We can now summarize the scope of our treatment. In Part I we shall be


concerned with linear, constant-coecient dierence equations. The general
n-th order form of such equations is
fq |wnq + fq3 |wnq3 + === + f |wn + ff |w = j(w)>

(2.1)

where the f s are given constant and j(w) is a known function. Some f s
may be zero, but of course both fq and ff must be dierent from zero if the
4
Actually, this function is also the only one that satises the equation. This is shown
by the `existence and uniqueness' theorem, which we shall not treat. All types of equations
considered in this book are `well-behaved', i.e. their solution exists and is unique.

12

Chapter 2. Dierence Equations: General Principles

equation is of order q. Eq. (2.1) is called the forward form; the equivalent
backward form is
fq |w + fq3 |w3 + === + f |w3qn + ff |w3q = j(w)=

(2.2)

In order to avoid cumbersome sentences, from now on we shall use the


expression `dierence equations' (or even, where there is no danger of misunderstanding, simply `equations') in the sense of `ordinary dierence equations,
linear and with constant coecients'.
We must now distinguish between homogeneous and non-homogeneous
equations. Eq. (2.1) is non-homogeneous; the corresponding q-th order
homogeneous equation is
fq |wnq + fq3 |wnq3 + === + f |wn + ff |w = 0=

(2.3)

The reason for dealing with these two forms separately is that the solution
of Eq. (2.1) can be obtained in a relatively simple manner when the solution
of Eq. (2.3) is known.

2.2.1

The homogeneous equation

The following theorems are fundamental in the theory of homogeneous difference equations:
Theorem 2=2 If | (t) is a solution of the homogeneous equation, then
D| (w), where A is an arbitrary constant, is also a solution.
The proof is simple. Assume that | (w) satises Eq. (2.3). Substitute
D| (w) in the same equation, obtaining
fq D| (w + q) + fq3 D| (w + q  1) + === + f D| (w + 1) + ff D| (w) = 0;
therefore
D[fq | (w + q) + fq3 | (w + q  1) + === + f | (w + 1) + ff | (w)] = 0=
If D| (w) has to be a solution the last relation must be satised. Since
| (w) is a solution of Eq. (2.3), the expression in square brackets vanishes,
and so the relationship
D[fq | (w + q) + fq3 | (w + q  1) + === + f | (w + 1) + ff | (w)] = 0
is satised. This proves the theorem.
Before going on to the next theorem, it is as well to recall the notion of
linearly independent functions.
Given q functions | (w)> |2 (w)> ===> |q (w), they are said to be linearly dependent if q constants D > D2 > ===> Dq exist, which do not all vanish, and such
that the equation
A y (t) + A2 y2 (t) + === + Ap yp (t) = 0

(2.4)

13

2.2. Linear dierence equations with constant coecients

is identically satised for all admissible values of w= Otherwise the functions


are linearly independent.
Theorem 2.3 If | (w)> |2 (w) are two distinct (i.e., linearly independent)
solutions of the homogeneous equation (nA1), then D | (w) + D2 |2 (w) is also
a solution for any two constants D > D2 =
The proof is similar to that of Theorem 2.2 and is left as an exercise.
Theorem 2.3|called the superposition theorem|can easily be extended
to any number n  q of distinct solutions of Eq. (2.3), and gives us the
procedure to obtain the general solution of Eq. (2.3). This procedure consists in nding q distinct solutions y (t)> y 2 (t)> ===> y q (t) and combining them
linearly, as stated in Theorem 2.4:
Theorem 2.4 The general solution of Eq. (2.3) is given by
i(w; D > D2 > ===> Dq ) = D | (w) + D2 |2 (w) + === + Dq |q (w)>

(2.5)

where y (t)> y 2 (t)> ===> y q (t) are n linearly independent solutions of Eq. (2.3),
and D > D2> ===> Dq are arbitrary constants.
The proof is straightforward: by Theorem 2.3, the function (2.5) is a solution of the dierence equation (2.3). Since this function contains exactly
q arbitrary constants, we can conclude|from Theorem 2.1|that it is the
general solution of Eq. (2.3). The practical problem of how to nd the q
functions y (t), y 2 (t), ..., y q (t) will be tackled in the following chapters; for
the moment we observe that, given a homogeneous equation of order q, a set
of q linearly independent solutions is called a fundamental set. The condition
for a set of q solutions to form a fundamental set is contained in Theorem 2.5.
Theorem 2.5 Let y (t)> y 2 (t)> ===> y q (t) be n solutions of Eq. (2.3). They
are linearly independent (i.e. form a fundamental set) if, and only if, the
following determinant (called the Casorati determinant)

G(w) =

| (w)
| (w + 1)
===
| (w + q  1)

|2 (w)
|2 (w + 1)
===
|2 (w + q  1)

===
===
===
===

|q (w)
|q (w + 1)
===
|q (w + q  1)

(2.6)

is dierent from zero for all admissible values of t.


To prove this theorem, consider Eq. (2.4): since the functions we are
considering are solutions to Eq. (2.3), they hold for any w by denition of
solution, and hence also for w + 1> ===> w + q  1. Hence we can write the
following linear system

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Chapter 2. Dierence Equations: General Principles

D | (w)
D | (w + 1)
===
D | (w + q  1)

+D2 |2 (w)
+D2 |2 (w + 1)
===
+D2 |2 (w + q  1)

+===+
+===+
===
+===+

Dq |q (w)
Dq |q (w + 1)
===
Dq |q (w + q  1)

= 0>
= 0>
===
= 0>

(2.7)

which is a system of homogeneous linear equations. According to a wellknown theorem in elementary algebra, when G(w) 9= 0, system (2.7) admits
only the null solution, i.e. holds true if, and only if, D = D2 = === = Dq = 0,
which is the denition of linearly independent functions (see above). On
the contrary, G(w) = 0 is the necessary and sucient condition for system
(2.7) to possess non-trivial solutions (i.e., solutions with at least one non-zero
Dl > l = 1> 2> ===> q), which is the denition of linearly dependent functions.

2.2.2

The non-homogeneous equation

We have so far dealt with the homogeneous dierence equation. We now


prove the basic theorem concerning the solution of the non-homogeneous difference equation.
Theorem 2.6 If |(w) is any particular solution of the non-homogeneous
equation [i.e., |(w) is any function that satises (2.1)], the general solution
of the same equation is obtained adding |(w) to the general solution of the
corresponding homogeneous equation, namely
|(w) = |(w) + i (w; D > D2 > ===> Dq )

(2.8)

is the general solution of the non-homogeneous equation.


The proof of the theorem can be given substituting (2.8) into (2.1) and
checking that the latter is satised. Since the function (2.8) contains exactly
q arbitrary constants, it is the general solution of Eq. (2.1).
The general solution of the homogeneous equation is thus only a part
of the general solution of the non-homogeneous equation, and so it is not
`general' with respect to the latter. This means that the expression `general solution' must always be qualied. As a matter of terminology, note the
following: (1) some authors use the world `integral' (particular or general) instead of `solution' but with the same meaning; (2) the expression `particular
solution' is also used (a) in the sense of a solution obtained from the general
solution by giving specic values to the arbitrary constants, and (b) in the
sense of any single non-general solution of the homogeneous equation (i.e.,
to indicate any one of | (w)> |2 (w)> etc.); (3) the expression `complementary
function' is used to indicate the general solution of the homogeneous equation when considered as part of the general solution of the non-homogeneous

2.3. Determination of the arbitrary constants

15

equation, and the expression `reduced equation' is used to indicate the homogeneous part of a non-homogeneous equation, i.e. the corresponding homogeneous equation obtained putting j(w)  0 in the course of the procedure to
solve a non-homogeneous equation. To avoid confusion, we shall not adopt
these uses.
Theorem 2.6 contains the method to follow for solving the non-homogeneous equation:
(a) nd a particular solution |(w) of the non-homogeneous equation;
(b) put j(w)  0 and solve the resulting homogeneous equation (often
called the `reduced' equation);
(c) add the two results.
Steps (a) and (b) can be taken in any order; step (c) gives the general
solution of the non-homogeneous equation.
The particular solution of the non-homogeneous equation will depend,
ceteris paribus, on the form of the known function j(w)= This suggest the following general approach: to nd a particular solution of the non-homogeneous
equation, try a function having the same form of g(t) but with undetermined
constant(s) (e.g., if j(w) is a constant, try an undetermined constant; if it
is an exponential function, try the same exponential function with an undetermined multiplicative constant, and so on). Substitute this function in
the non-homogeneous equation and determine the coecient(s) so that the
equation is satised.
This method|called method of undetermined coecients|will be expounded in more detail in the following chapter, where we shall also examine
the cases in which it cannot be applied.
It is interesting to note, from the economic point of view, that in the
general solution of the non-homogeneous equation the particular solution
|(w) may usually be interpreted as the equilibrium state of the variable | (a
stationary equilibrium or a moving equilibrium according to whether |(w) is a
constant or a function of w ). The component i (w; D > D2 > ===> Dq ) in Eq. (2.8)
may then be interpreted as giving the deviations from the equilibrium. Of
course, from the mathematical point of view it is always true that |(w)
| (w) =
i (w; D > D2 > ====> Dq )> independently of the possibility of giving an economic
interpretation to the particular solution |(w)=

2.3

Determination of the arbitrary constants

The problem remains of how to determine the arbitrary constants Dl . To do


this we need an adequate number of additional conditions. This need derives
from the fact that the solution|namely Eq. (2.5) or Eq. (2.8) as the case
may be|of the dierence equation under consideration gives only the form of
the function |(w) but not its position in the Cartesian plane (w> |). However,
as soon as the function is constrained to pass through q given points, its

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Chapter 2. Dierence Equations: General Principles

position|which depends on q arbitrary constants|is determined, and the


arbitrariness of the constants disappears.
More formally, to determine the q arbitrary constants, q additional conditions are needed, which usually take the form
|(w)
|(w)
===
|(w)

= |f
= |
===
= |q3

for
for
===
for

w
w
===
w

= 0>
= 1>
===
= q  1>

where |f > | > ========|q3 are known values (whence the name of initial conditions). Substituting such values in the general solution, we obtain a system of
q linear equations in the q unknowns D > D2 > =======> Dq = Consider for example
the general solution of Eq. (2.1)
|(w) = D | (w) + D2 |2 (w) + ======= + Dq |q (w) + |(w)>
where | (w)> |2 (w)> |q (w) are q distinct solutions of the corresponding homogeneous equation. Substituting the given values |f etc. in the place of |(0)
etc. we obtain, after rearranging terms,
D | (0) + D2 |2 (0) + === + Dq |q (0)
D | (1) + D2 |2 (1) + === + Dq |q (1)
===
D | (q  1) + D2 |2 (q  1) + === + Dq |q(q  1)

= |f  |(0)>
= |  |(1)>
(2.9)
===
= |q3  |(q  1)>

where of course |(0)> |(1)> ====== |(q  1) are absent if we consider the solution
of the homogeneous equation (2.3). System (2.9) is a linear system whose
determinant is

G(0) =

| (0)
| (1)
===
| (q  1)

|2 (0)
|2 (1)
===
|2 (q  1)

===
===
===
===

|q (0)
|q (1)
===
|q (q  1)

It is easy to see that G(0) coincides with the determinant G(w)|as dened
in Eq. (2.6)|for w = 0= Since the functions | (w)> |2 (w)> ===> |q (w) form a fundamental set, G(w) is dierent from zero for any w, and so also for w = 0. It
follows that G(0) 9= 0. Thus system (2.9) can always be solved.
We now have enough general principles to pass on to a detailed treatment
of the dierence equations of the various orders.

2.4

References

Boole, G., 1960 (1872), A Treatise on the Calculus of Finite Dierences,


Chap. IX, pp. 157-161.

2.4. References

17

Goldberg, S., 1958, Introduction to Dierence Equations, Chaps. 1, 2, 3.


Kenkel, J.L., 1974, Dynamic Linear Economic Models, Chaps. 3, 5.
Milne-Thomson, L.M., 1960, The Calculus of Finite Dierences, Chap. XII.

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