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Shilnikov chaos, low interest rates, and new Keynesian macroeconomics

William Barnett (), Giovanni Bella (), Taniya Ghosh (), Paolo Mattana () and Beatrice Venturi ()
Additional contact information
Giovanni Bella: University of Cagliari
Paolo Mattana: University of Cagliari
Beatrice Venturi: University of Cagliari

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: The paper shows that in a New Keynesian (NK) model, an active interest rate feedback monetary policy, when combined with a Ricardian passive fiscal policy, a la Leeper-Woodford, may induce the onset of a Shilnikov chaotic attractor in the region of the parameter space where uniqueness of the equilibrium prevails locally. Implications, ranging from long-term unpredictability to global indeterminacy, are discussed in the paper. We find that throughout the attractor, the economy lingers in particular regions, within which the emerging aperiodic dynamics tend to evolve for a long time around lower-than-targeted inflation and nominal interest rates. This can be interpreted as a liquidity trap phenomenon, produced by the existence of a chaotic attractor, and not by the influence of an unintended steady state or the Central Bank's intentional choice of a steady state nominal interest rate at its lower bound. In addition, our finding of Shilnikov chaos can provide an alternative explanation for the controversial loanable funds over-saving theory, which seeks to explain why interest rates and, to a lesser extent inflation rates, have declined to current low levels, such that the real rate of interest is below the marginal product of capital. Paradoxically, an active interest rate feedback policy can cause nominal interest rates, inflation rates, and real interest rates unintentionally to drift downwards within a Shilnikov attractor set. Policy options to eliminate or control the chaotic dynamics are developed.

Keywords: Shilnikov chaos criterion; global indeterminacy; long-term un-predictability; liquidity trap (search for similar items in EconPapers)
JEL-codes: C61 C62 E12 E52 E63 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-01
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Working Paper: Shilnikov Chaos, Low Interest Rates, and New Keynesian Macroeconomics (2020) Downloads
Working Paper: Shilnikov Chaos, Low Interest Rates, and New Keynesian Macroeconomics (2020) Downloads
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