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Stabilization Policy As Bifurcation Selection: Would Stabilization Policy Work If The Economy Really Were Unstable?

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Author Info
Barnett, William A.
He, Yijun

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Abstract

Taken literally, the concept of stabilization policy implicitly assumes that the macroeconomy is unstable without imposition of a policy. Hence, selection of a stabilization policy can be viewed as selection of a policy to bifurcate the system from an unstable to a stable operating regime. The literature on dynamics of high-dimensional systems suggests that successful bifurcation selection is challenging. As an experiment to investigate this point of view, we use the continuous-time UK dynamic macroeconometric model. Under assumptions designed to be most favorable to stabilization policy, we find that policies that would produce successful bifurcation are very complicated. We also find that less complicated policies based upon reasonable economic intuition can be counterproductive, since such policies can contract the size of the stable subset of the parameter space. In fact, an economy that is dynamically stable without policy, but subject to stochastic shocks, could be bifurcated to instability with imposition of a poorly designed stabilization policy.

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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 6 (2002)
Issue (Month): 05 (November)
Pages: 713-747
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Handle: RePEc:cup:macdyn:v:6:y:2002:i:05:p:713-747_02

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  1. Yijun He & William Barnett, 2004. "Singularity Bifurcations," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200412, University of Kansas, Department of Economics, revised Oct 2004. [Downloadable!]
    Other versions:
  2. Peter N. Ireland, 2007. "Commentary on "Monetary policy as equilibrium selection"," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 343-348. [Downloadable!]
  3. William Barnett & Mehmet Dalkir, 2005. "Gains from Synchronization," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200511, University of Kansas, Department of Economics, revised Apr 2005. [Downloadable!]
    Other versions:
  4. He, Yijun & Barnett, William, 2006. "Existence of bifurcation in macroeconomic dynamics: Grandmont was right," MPRA Paper 756, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  5. William Barnett, 2005. "Comment on 'Chaotic Monetary Dynamics with Confidence'," Macroeconomics 0505017, EconWPA. [Downloadable!]
    Other versions:
  6. William A. Barnett & Barry E. Jones & Milka Kirova & Travis Nesmith & Meenakshi Pasupathy, 2004. "The Nonlinear Skeletons in the Closet," Econometrics 0405003, EconWPA. [Downloadable!]
    Other versions:
  7. Barnett, William A. & Duzhak, Evgeniya A., 2008. "Empirical assessment of bifurcation regions within new Keynesian models," MPRA Paper 11249, University Library of Munich, Germany. [Downloadable!]
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  8. Orlando Gomes & Vivaldo M. Mendes & Diana A. Mendes, 2007. "The Dynamics of Learning in Optimal Monetary Policy," Working Papers ercwp2008, ISCTE, UNIDE, Economics Research Centre. [Downloadable!]
  9. Barnett, William A. & Duzhak, Evgeniya, 2006. "Non-Robust Dynamic Inferences from Macroeconometric Models: Bifurcation Stratification of Confidence Regions," MPRA Paper 402, University Library of Munich, Germany. [Downloadable!]
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  10. William A. Barnett & Yijun He, 2002. "Bifurcations in Macroeconomic Models," Macroeconomics 0210006, EconWPA. [Downloadable!]
  11. Barnett, William A. & He, Susan, 2009. "Existence of Singularity Bifurcation in an Euler-Equations Model of the United States Economy: Grandmont was Right," MPRA Paper 12803, University Library of Munich, Germany. [Downloadable!]
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