Chaos Theory and Macroeconomics
Chaos theory has entered the old debate between Classicals and Keynesians regarding the nature of macroeconomic fluctuations and the ability and desirability of government efforts to stabilize them. In its current form between New Classicals and New Keynesians both sides use the assumption of rational expectations to varying degrees. For the New Classicals (Lucas, 1972, 1975; Barro, 1974; Kydland and Prescott, 1982; and Long and Plosser, 1983) real business cycles arise from exogenous supply-side shocks to a basically stable economy which lead to fluctuations due to sectoral or labor market misperceptions or “time-to-build” lags in capital investment. Government stabilization policies will be ineffective if systematic and non-optimal if effective.
KeywordsLyapunov Exponent Golden Rule Chaos Theory Perfect Foresight Real Business Cycle
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