Controlling Chaotic Fluctuations through Monetary Policy

Asano Takao (), Akihisa Shibata and Yokoo Masanori ()
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Asano Takao: Faculty of Economics, Okayama University, Tsushimanaka 3-1-1, Kita-ku, Okayama 700-8530, Japan
Yokoo Masanori: Faculty of Economics, Okayama University, Tsushimanaka 3-1-1, Kita-ku, Okayama 700-8530, Japan

Studies in Nonlinear Dynamics & Econometrics, 2025, vol. 29, issue 1, 53-69

Abstract: This paper applies the chaos control method (the OGY method) proposed by Ott, E., C. Grebogi, and J. A. Yorke. (1990. “Controlling Chaos.” Physical Review Letters 64: 1196–9) to policy-making in macroeconomics. This paper demonstrates that the monetary equilibrium paths in a discrete-time, two-dimensional overlapping generations model exhibit chaotic fluctuations depending on the money supply rate and the elasticity of substitution between capital and labor under the assumption of the constant elasticity of substitution (CES) production function. We also show that the chaotic fluctuations can be stabilized by controlling the money supply rate by using the OGY method and that even when the OGY method does not work due to periodic attractors, adding moderate stochastic shocks to the model can successfully stabilize the economy.

Keywords: macroeconomy; chaos control; OGY method; monetary policy; OLG model; chaos (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/snde-2023-0015

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