Routes to chaos in macroeconomic theory

Abstract

Purpose

The purpose of this paper is to survey literature on macroeconomic nonlinear dynamics.

Design/methodology/approach

The paper identifies five influential types of models where the possible generation of endogenous cycles and chaotic motion arises. First, the frameworks that make use of the one‐hump logistic type equation; second, the models inspired on the growth literature of the 1940s; third, intertemporal utility maximization problems with increasing returns; fourth, models that can be represented as piecewise dynamic maps; and, fifth, bounded rationality – heterogeneous expectations setups.

Findings

The attention will be mainly focused on the theme of business cycles; an interpretation of the deterministic real business cycle model with increasing returns is proposed and a graphical analysis of the underlying system shows that strange attractors are observable for specific sets of parameter values.

Practical implications

The study of endogenous cycles in macroeconomic literature has important implications for policy: if fluctuations are due to deterministic reasons this may imply that by manipulating policy parameters governments may be able to change the qualitative nature of the economy's dynamics.

Originality/value

The paper gives a comprehensive view of nonlinear dynamics in macroeconomics. It shows that various relevant subjects might be addressed in this kind of models, e.g. economic growth, asset pricing, business cycles, consumption decisions, among others.

Citation

Gomes, O. (2006), "Routes to chaos in macroeconomic theory", Journal of Economic Studies, Vol. 33 No. 6, pp. 437-468. https://doi.org/10.1108/01443580610710406