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Chaotic Behaviour in a Simple Model of Inflation

David Chappell

The Manchester School of Economic & Social Studies, 1997, vol. 65, issue 3, 235-43

Abstract: A simple model of inflation is proposed. The model is set in discrete time and consists of a demand for money equation, a government budget constraint, and two alternative mechanisms for the formation of expectations of the inflation rate--adaptive expectations and rational expectations. It is shown that when expectations are adaptive the model can exhibit chaotic behavior for a range of plausible parameter values, but with rational expectations chaotic behavior is not possible. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester

Date: 1997
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Handle: RePEc:bla:manch2:v:65:y:1997:i:3:p:235-43