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A two regime model of inflation and unemployment fluctuations

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  • Juan Gabriel Brida

Abstract

In this paper we present a formal definition of the notions of economic regime and regime dynamics. Starting from these definitions, we discuss a multiple regime dynamic model generating an endogenous unemployment-price adjustment mechanism. Two different employment regimes are introduced and the regime dynamics properties of the model are analyzed. Specifically, we assume that the equations governing employment and prices dynamics undergo a discontinuous change in regime when a critical value of unemployment rate is reached. Depending on parameter values, we show that this model is capable of producing a rich variety of dynamic behavior, including complex irregular fluctuations. The main result of this paper is the representation of the regime dynamics via symbolic dynamics. In particular, we show that the regime dynamics of the model can be represented by a shift of finite type that depends on parameter values. In some particular cases, we can also have a representation via directed vertex graphs. An important consequence of this is the possibility of measuring the complexity of the model by using the entropy measure.

Suggested Citation

  • Juan Gabriel Brida, 2000. "A two regime model of inflation and unemployment fluctuations," Documentos de Trabajo (working papers) 1100, Department of Economics - dECON.
    • Handle: RePEc:ude:wpaper:1100
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    File URL: https://hdl.handle.net/20.500.12008/1921
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    References listed on IDEAS

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    1. Ferri, Piero & Greenberg, Edward, 1990. "A wage-price regime switching model," Journal of Economic Behavior & Organization, Elsevier, vol. 13(1), pages 77-95, January.
    2. Honkapohja, Seppo & Ito, Takatoshi, 1983. "Stability with regime switching," Journal of Economic Theory, Elsevier, vol. 29(1), pages 22-48, February.
    3. Layard, Richard & Nickell, Stephen, 1986. "Unemployment in Britain," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages 121-169, Supplemen.
    4. Nickell, Stephen J, 1987. "Why Is Wage Inflation in Britain So High?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 49(1), pages 103-128, February.
    5. Nickell, Stephen J, 1990. "Unemployment: A Survey," Economic Journal, Royal Economic Society, vol. 100(401), pages 391-439, June.
    6. de La Grandville, Olivier, 1987. "On two-regime discrete-time models : A methodological note," Journal of Economic Behavior & Organization, Elsevier, vol. 8(3), pages 513-530, September.
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