Journal of Evolutionary Economics

, Volume 29, Issue 2, pp 563–580 | Cite as

Nonlinear policy behavior, multiple equilibria and debt-deflation attractors

  • Alessandro PiergalliniEmail author
Regular Article


This paper analyzes global dynamics in a macroeconomic model where both monetary and fiscal policies are nonlinear, consistent with empirical evidence. Nonlinear monetary policy, in which the nominal interest rate features an increasing marginal reaction to inflation, interacting with nonlinear fiscal policy, in which the primary budget surplus features an increasing marginal reaction to debt, gives rise to four steady-state equilibria. Each steady state exhibits in its neighborhood a pair of ‘active’/‘passive’ monetary/fiscal policies à la Leeper-Woodford, and is typically investigated in isolation within linearized monetary models. We show that, when global nonlinear dynamics are taken into account, such steady states are endogenously connected. In particular, the global dynamics reveals the existence of infinite self-fulfilling paths that originate around the steady states locally displaying either monetary or fiscal ‘dominance’—and thus locally delivering equilibrium determinacy—as well as around the unstable steady state with active monetary-fiscal policies, and that converge into an unintended high-debt/low-inflation (possibly deflation) attractor. Such global trajectories—bounded by two heteroclinic orbits connecting the three out-of-the-trap steady states—are, however, obscured if the four monetary-fiscal policy mixes are studied locally and disjointly.


Nonlinear monetary and fiscal policy behavior Evolutionary macroeconomic modeling Multiple equilibria Global nonlinear dynamics Debt-deflation traps 

JEL Classification

E52 E62 E63 D91 C61 C62 



I am very grateful to three anonymous referees for many valuable comments and suggestions. I also wish to thank Giorgio Rodano for very helpful discussions on this line of enquiry and Paolo Canofari, Alessia Franzini, Alessandro Leopardi and Michele Postigliola for very useful comments and remarks. The usual disclaimers apply.

Compliance with Ethical Standards

Conflict of Interest

The author declares that he has no conflict of interest.


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Economics and FinanceUniversity of Rome Tor VergataRomeItaly

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