CHAOTIC DYNAMICS OF FINANCING INVESTMENT

Soumya Datta

Metroeconomica, 2005, vol. 56, issue 1, 58-84

Abstract: The paper introduces the financial sector in a standard multiplier‐accelerator framework by incorporating financial variables in the investment function. The resultant equation is similar in form to that of a logistic map, and hence behaves unpredictably under certain values of the parameters. Since monetary authorities have a large influence on many of these parameters, monetary policies are effective in both controlling investment and preventing or postponing a financial crisis. The monetary authorities, however, are also keen to play an additional role of keeping the system predictable. Under certain conditions, there could be a conflict between these two objectives—of preventing a financial crisis and keeping the system predictable.

Date: 2005
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