Catastrophe theory: An application to a business cycle model (Q1107409)

The properties of equilibria in regular economies have been studied extensively. In particular, the continuity of equilibria has been investigated using differential topology. \textit{G. Debreu} [Am. Econ. Rev. Pap. Proc., 280-287 (1976)] surveys the application of differential topology to regular economies. Research on the possible discontinuities of equilibria in non-regular (singular) economies, emphasizing differential topology, has used an approach similar to Thom's theorem of catastrophe theory. The present paper uses techniques of differential topology to determine the conditions under which catastrophes may occur in a business cycle model, extending previous models [e.g. \textit{H. R. Varian}, Econ. Inquiry 17, 14-28 (1979)] to incorporate interest rate (money market) adjustment behavior. It is shown that particular subsets of the model's parameters change the structural stability of the model and one may observe a cusp catastrophe in the set of equilibria.