Stabilization Policy Can Lead to Chaos

Gerald Dwyer

Economic Inquiry, 1992, vol. 30, issue 1, 40-46

Abstract: Nonlinearities in economies, as elsewhere, can generate chaotic equilibria. The presence of Pareto-inferior chaotic equilibria might seem reason enough to use stabilization policy to select preferable equilibria. However, the author shows that a stabilization policy with feedback can itself lead to chaotic dynamics. Thus, the existence of nonlinearities is the economy does not by itself justify monetary or fiscal policies aimed at reducing economic instability. Current evidence cannot distinguish whether monetary policy stabilizes a nonlinear economy, creates nonlinear dynamics in the economy, or both. Copyright 1992 by Oxford University Press.

Date: 1992
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