Introduction

Abstract

Economic systems exhibit ubiquitous complex dynamics evidenced by large-amplitude and aperiodic fluctuations in economic variables such as foreign exchange rates, gross domestic product, interest rates, production, stock market prices and unemployment (Hommes 2004). Traditionally, economists have studied economic dynamics using the Newtonian approach by treating the economic fluctuations as linear perturbations near the equilibrium (Scarth 1996, Gandolfo 1997, Shone 2002). The linear approach is valid only for small-amplitude fluctuations and cannot describe the complex characteristics of largeamplitude and aperiodic economic fluctuations. Large-amplitude fluctuations in economic and financial systems are indications that these systems are driven far away from the equilibrium whereby the nonlinearity dominates the system behavior; aperiodic economic and financial fluctuations are manifestations of chaos intrinsic in a complex system. Hence, a non-Newtonian approach based on nonlinear dynamics is required to understand the nature of complex economic dynamics.

In recent years, there is a growing interest in applying nonlinear dynamics to economic modeling. For example, Chiarella (1988) introduced a general nonlinear supply function into the traditional cobweb model under adaptive expectations, and showed that in its locally unstable region it contains a regime of period-doubling followed by a chaotic regime.