 Balanced-budget rules: Chaos and deterministic sunspotsJournal of Economic Theory, 2010, vol. 145, issue 3, 1060-1085 Abstract: Schmitt-Grohé and Uribe [11] illustrate that a balanced-budget rule can lead to aggregate instability. In particular, under such a rule it is possible for a steady state to be locally indeterminate, and therefore sunspot equilibria are possible. In this paper, I extend their analysis to investigate the possibility of chaotic equilibria under a balanced-budget rule. A global analysis reveals Euler equation branching which means that the dynamics going forward are generated by a differential inclusion of the form . Each branch alone will not imply interesting dynamics. However, by switching between the branches, I show that the existence of Euler equation branching in an arbitrarily small neighborhood of a steady state implies topological chaos in the sense of Devaney on a compact invariant set with non-empty interior (the chaos is "thick"). Moreover, the chaos is robust to small perturbations. This branching under a balanced-budget rule occurs independently of the local uniqueness of the equilibrium around the steady state(s). Keywords: Balanced-budget; rule; Euler; equation; branching; Sunspots; Indeterminacy; Cycles; Chaos; Multi-valued; dynamical; system; Differential; inclusion; Regime; switching (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:145:y:2010:i:3:p:1060-1085 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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