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Stabilization Policy Can Lead to Chaos


  • Dwyer, Gerald P, Jr


Nonlinearities in economies, as elsewhere, can generate chaotic equilibria. The presence of Pareto-inferior chaotic equilibria might seem reason enough to use stabilization policy to select preferable equilibria. However, the author shows that a stabilization policy with feedback can itself lead to chaotic dynamics. Thus, the existence of nonlinearities is the economy does not by itself justify monetary or fiscal policies aimed at reducing economic instability. Current evidence cannot distinguish whether monetary policy stabilizes a nonlinear economy, creates nonlinear dynamics in the economy, or both. Copyright 1992 by Oxford University Press.

Suggested Citation

  • Dwyer, Gerald P, Jr, 1992. "Stabilization Policy Can Lead to Chaos," Economic Inquiry, Western Economic Association International, vol. 30(1), pages 40-46, January.
  • Handle: RePEc:oup:ecinqu:v:30:y:1992:i:1:p:40-46

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    References listed on IDEAS

    1. Eckbo, B. Espen, 1983. "Horizontal mergers, collusion, and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 241-273, April.
    2. Ordover, Janusz A & Saloner, Garth & Salop, Steven C, 1990. "Equilibrium Vertical Foreclosure," American Economic Review, American Economic Association, vol. 80(1), pages 127-142, March.
    3. Michael A. Salinger, 1988. "Vertical Mergers and Market Foreclosure," The Quarterly Journal of Economics, Oxford University Press, vol. 103(2), pages 345-356.
    4. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    5. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
    6. Allen, Bruce T, 1971. "Vertical Integration and Market Foreclosure: The Case of Cement and Concrete," Journal of Law and Economics, University of Chicago Press, vol. 14(1), pages 251-274, April.
    7. Dodd, Peter, 1980. "Merger proposals, management discretion and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 8(2), pages 105-137, June.
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    Cited by:

    1. Soliman, A. S., 1996. "Transitions from stable equilibrium points to periodic cycles to chaos in a phillips curve system," Journal of Macroeconomics, Elsevier, vol. 18(1), pages 139-153.

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