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Stabilization Policy Can Lead to Chaos

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  • Dwyer, Gerald P, Jr

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.

Suggested Citation

  • Dwyer, Gerald P, Jr, 1992. "Stabilization Policy Can Lead to Chaos," Economic Inquiry, Western Economic Association International, vol. 30(1), pages 40-46, January.
    • Handle: RePEc:oup:ecinqu:v:30:y:1992:i:1:p:40-46
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    Cited by:

    1. Hartwell, Christopher A., 2019. "Short waves in Hungary, 1923 and 1946: Persistence, chaos, and (lack of) control," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 532-550.
    2. Gerald P. Dwyer, 1993. "Rules and discretion in monetary policy," Review, Federal Reserve Bank of St. Louis, issue May, pages 3-13.
    3. Soliman, A. S., 1996. "Transitions from stable equilibrium points to periodic cycles to chaos in a phillips curve system," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 139-153.

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