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Center Manifold, Stability, and Bifurcations in Continuous Time Macroeconometric Systems

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  • William Barnett

    (Department of Economics, The University of Kansas)

  • Yijun He

    (Washington University in St.Louis)

Abstract

In a recent paper, we studied bifurcation phenomena in continuous time macroeconometric models. The objective was to explore the relevancy of Grandmont's (1985) findings to models permitting more reasonable elasticities than were possible in Grandmont's Cobb Douglas overlapping generations model. Another objective was to explore the relevancy of his findings to a model in which some solution paths are not Pareto optimal, so that policy rules can serve a clearly positive purpose. We used the Bergstrom, Nowman, and Wymer (1992) UK continuous time second order differential equations macroeconometric model that permits closer connection with economic theory than is possible with most discrete time structural macroeconometric models. We do not yet have the ability to explore these phenomena in a comparably general Euler equations model having deep parameters, rather than structural parameters. It was discovered that the UK model displays a rich set of bifurcations including transcritical bifurcations, Hopf bifurcations, and codimension two bifurcations. The point estimates of the parameters are in the unstable region. But we did not test the null hypothesis that the parameters are actually in the stable region. In addition, we did not investigate the dynamical properties on the bifurcation boundaries; and we did not investigate the relevancy of stabilization policy rules. In this paper, we further examine the stability properties and bifurcation boundaries of the UK continuous time macroeconometric models by analyzing the stability of the model along center manifolds. The results of this paper show that the model is unstable on bifurcation boundaries for those cases we consider. Hence calibration of the model to operate on those bifurcation boundaries would produce no increase in the model's ability to explain observed data. However, we have not yet determined the dynamic properties of the model on the Hopf bifurcation boundaries, which sometimes do produce useful dynamical properties for some models. Of more immediate interest, it is also shown that bifurcations exist within the Cartesian product of 95% confidence intervals for the estimators of the individual parameters. This seems to suggest that we cannot reject the null hypothesis of stability, despite the fact that the point estimates are in the unstable region. However, when we decreased the confidence level to 90%, the intersection of the stable region and the Cartesian product of the confidence intervals became empty, thereby suggesting rejection of stability. But a formal sampling theoretic hypothesis test of that null would be very difficult to conduct, since some of the sampling distributions are truncated by boundaries, and since there are some corner solutions. A Bayesian approach might be possible, but would be very difficult to implement. A new formula is also given for finding the closed forms of transcritical bifurcation boundaries. Finally, effects of fiscal policy on stability are considered. It is found that change in fiscal policy may affect the stability of the continuous time macroeconometric models. But we find that the selection of an advantageous stabilization policy is more difficult than expected. Augmentation of the model by feedback policy rules chosen from plausible economic reasoning can contract the stable region and thereby be counterproductive, even if the policy is time consistent and has insignificant effect on structural parameter values.

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Bibliographic Info

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201227.

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Length: 30 pages
Date of creation: Sep 2012
Date of revision: Sep 2012
Handle: RePEc:kan:wpaper:201227

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Keywords: Stability; bifurcation; macroeconometric systems;

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  1. Benhabib, Jess & Nishimura, Kazuo, 1979. "The hopf bifurcation and the existence and stability of closed orbits in multisector models of optimal economic growth," Journal of Economic Theory, Elsevier, Elsevier, vol. 21(3), pages 421-444, December.
  2. Jean-Michel Grandmont, 1997. "Expectations Formation and Stability of Large Socioeconomic Systems," Working Papers, Centre de Recherche en Economie et Statistique 97-27, Centre de Recherche en Economie et Statistique.
  3. William A. Barnett & Alfredo Medio & Apostolos Serletis, 1997. "Nonlinear and Complex Dynamics in Economics," Econometrics, EconWPA 9709001, EconWPA.
  4. Herbert E. Scarf, 1959. "Some Examples of Global Instability of the Competitive Equilibrium," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 79, Cowles Foundation for Research in Economics, Yale University.
  5. Aditya Goenka & David Kelly & Stephen Spear, . "Endogenous Strategic Business Cycles," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2, Carnegie Mellon University, Tepper School of Business.
  6. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, Econometric Society, vol. 53(5), pages 995-1045, September.
  7. Barnett, William A. & Gallant, A. Ronald & Hinich, Melvin J. & Jungeilges, Jochen A. & Kaplan, Daniel T. & Jensen, Mark J., 1997. "A single-blind controlled competition among tests for nonlinearity and chaos," Journal of Econometrics, Elsevier, Elsevier, vol. 82(1), pages 157-192.
  8. Bergstrom, A. R. & Nowman, K. B. & Wandasiewicz, S., 1994. "Monetary and fiscal policy in a second-order continuous time macroeconometric model of the United Kingdom," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(3-4), pages 731-761.
  9. Nieuwenhuis, Herman J. & Schoonbeek, Lambert, 1997. "Stability and the structure of continuous-time economic models," Economic Modelling, Elsevier, Elsevier, vol. 14(3), pages 311-340, July.
  10. Engelbert Dockner & Gustav Feichtinger, 1991. "On the optimality of limit cycles in dynamic economic systems," Journal of Economics, Springer, Springer, vol. 53(1), pages 31-50, February.
  11. Bergstrom, A. R. & Nowman, K. B. & Wymer, C. R., 1992. "Gaussian estimation of a second order continuous time macroeconometric model of the UK," Economic Modelling, Elsevier, Elsevier, vol. 9(4), pages 313-351, October.
  12. Medio,Alfredo & Gallo,Giampaolo, 1995. "Chaotic Dynamics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521484619.
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