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Is policy causing chaos in the United Kingdom?

Author

Listed:
  • Barnett, William A.
  • Bella, Giovanni
  • Ghosh, Taniya
  • Mattana, Paolo
  • Venturi, Beatrice

Abstract

We study the stability properties and conditions for the onset of Shilnikov chaos in the UK New Keynesian macroeconomy, as well as the shifts in equilibrium dynamics under various policy regimes. Shilnikov chaos emerges for a restricted part of the free parameter space in the baseline rational expectations UK model with no regime switching. Chaos did not occur, when the UK's central bank showed a weak response to inflation in the high-inflation regime, while it appears easily in the low-inflation regime associated with the central bank's use of aggressive monetary policy in recent years. As a policy alternative for restoring uniqueness, the local analysis proposes tightening the monetary policy rule via the Taylor coefficient along with passive fiscal policy. But we find that doing so could hasten the emergence of Shilnikov's chaotic dynamics. The magnitude of the Taylor coefficient thus becomes central in attaining the desired long run steady-state.

Suggested Citation

  • Barnett, William A. & Bella, Giovanni & Ghosh, Taniya & Mattana, Paolo & Venturi, Beatrice, 2022. "Is policy causing chaos in the United Kingdom?," Economic Modelling, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:ecmode:v:108:y:2022:i:c:s026499932200013x
    DOI: 10.1016/j.econmod.2022.105767
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    More about this item

    Keywords

    Shilnikov chaos; Liquidity trap; New keynesian; Taylor principle; Monetary policy; Inflation;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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