Chaotic dynamics in optimal monetary policy

DOI10.1140/EPJB/E2007-00123-6zbMATH Open1189.91099arXivnlin/0607064OpenAlexW3106472744MaRDI QIDQ978820FDOQ978820

Authors: V. M. Mendes, Orlando Gomes, Diana A. Mendes, J. Sousa Ramos 

Publication date: 25 June 2010

Published in: The European Physical Journal B. Condensed Matter and Complex Systems (Search for Journal in Brave)

Abstract: There is by now a large consensus in modern monetary policy. This consensus has been built upon a dynamic general equilibrium model of optimal monetary policy as developed by, e.g., Goodfriend and King (1997), Clarida et al. (1999), Svensson (1999) and Woodford (2003). In this paper we extend the standard optimal monetary policy model by introducing nonlinearity into the Phillips curve. Under the specific form of nonlinearity proposed in our paper (which allows for convexity and concavity and secures closed form solutions), we show that the introduction of a nonlinear Phillips curve into the structure of the standard model in a discrete time and deterministic framework produces radical changes to the major conclusions regarding stability and the efficiency of monetary policy. We emphasize the following main results: (i) instead of a unique fixed point we end up with multiple equilibria; (ii) instead of saddle--path stability, for different sets of parameter values we may have saddle stability, totally unstable equilibria and chaotic attractors; (iii) for certain degrees of convexity and/or concavity of the Phillips curve, where endogenous fluctuations arise, one is able to encounter various results that seem intuitively correct. Firstly, when the Central Bank pays attention essentially to inflation targeting, the inflation rate has a lower mean and is less volatile; secondly, when the degree of price stickiness is high, the inflation rate displays a larger mean and higher volatility (but this is sensitive to the values given to the parameters of the model); and thirdly, the higher the target value of the output gap chosen by the Central Bank, the higher is the inflation rate and its volatility.

Full work available at URL: https://arxiv.org/abs/nlin/0607064

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Mathematics Subject Classification ID

Macroeconomic theory (monetary models, models of taxation) (91B64) Strange attractors, chaotic dynamics of systems with hyperbolic behavior (37D45) Dynamical systems in optimization and economics (37N40) Applications of statistical and quantum mechanics to economics (econophysics) (91B80) Economic growth models (91B62)

Cites Work

• Optimal monetary policy with a nonlinear Phillips curve
• Nonlinear Monetary Policy Rules: Some New Evidence for the U.S.
• Monetary Policy with a Nonlinear Phillips Curve and Asymmetric Loss

Cited In (7)

• Nonlinear Phillips curves, mixing feedback rules and the distribution of inflation and output
• The Phillips curve as a long-run phenomenon in a macroeconomic model with complex dynamics
• Shilnikov chaos, low interest rates, and New Keynesian macroeconomics
• Title not available (Why is that?)
• The Phillips curve in a matching model
• Nonlinear Phillips-curves, endogenous NAIRU and monetary policy
• Money and inflation in a nonlinear model

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