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Controlling Endogenous Cycles in an OLG Economy by the OGY Method

Author

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  • Vivaldo M. Mendes

    () (ISCTE - Department of Economics and UNIDE-ERC)

  • Diana A. Mendes

    () (ISCTE - Department of Quantitative Methods and UNIDE-StatMath)

Abstract

We show that very complicated dynamics arising, e.g. from an overlapping generations model (OLG) with production and an endogenous intertemporal decision between labour and leisure, which produces hyperchaos (both eigenvalues with modulus higher than 1), can in fact be controlled or managed with relative simplicity. The aperiodic and very complicated motion that stems from this model can be subject to control by very small perturbations in its parameters and turned into a stable steady state or into a regular cycle. Therefore, the system can be controlled without a change of its original properties. To perform the control of chaos in this economic model we apply the pole-placement technique, developed by Romeiras, Grebogi, Ott and Dayawansa (1992). The application of control methods to chaotic economic dynamics may raise serious reservations, at least on mathematical and logical grounds, to some recent views on economics which have argued that economic policy becomes useless in the presence of chaotic motion (and thus, that the performance of the economic system cannot be improved by public intervention, i.e., that the amplitude of cycles cannot be controlled or reduced). In fact, the fine tuning of the system (that is, the control) can be performed without having to rely only on infinitesimal accuracy in the perturbation to the system, because the control can be performed with larger or smaller perturbations, but neither too large (because these would lead to a different fixed point of the system, therefore modifying its original nature), nor too small because the control becomes too ineffcient.

Suggested Citation

  • Vivaldo M. Mendes & Diana A. Mendes, 2007. "Controlling Endogenous Cycles in an OLG Economy by the OGY Method," Working Papers Series 1 ercwp0808, ISCTE-IUL, Business Research Unit (BRU-IUL).
  • Handle: RePEc:isc:iscwp1:ercwp0808
    as

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    File URL: http://bru-unide.iscte.pt/RePEc/pdfs/ERCwp0808.pdf
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    References listed on IDEAS

    as
    1. Medio,Alfredo & Gallo,Giampaolo, 1995. "Chaotic Dynamics," Cambridge Books, Cambridge University Press, number 9780521484619, April.
    2. Barnett, William A. & Serletis, Apostolos & Serletis, Demitre, 2015. "Nonlinear And Complex Dynamics In Economics," Macroeconomic Dynamics, Cambridge University Press, vol. 19(08), pages 1749-1779, December.
    3. Kaas, Leo, 1998. "Stabilizing chaos in a dynamic macroeconomic model," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 313-332, January.
    4. Holyst, Janusz A & Hagel, Tilo & Haag, Gunter & Weidlich, Wolfgang, 1996. "How to Control a Chaotic Economy?," Journal of Evolutionary Economics, Springer, vol. 6(1), pages 31-42, February.
    5. Michael Kopel, 1997. "Improving the performance of an economic system: Controlling chaos," Journal of Evolutionary Economics, Springer, vol. 7(3), pages 269-289.
    6. Bala, Venkatesh & Majumdar, Mukul & Mitra, Tapan, 1998. "A note on controlling a chaotic tatonnement," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 411-420, January.
    7. Medio, Alfredo, 1987. "Introduction," Journal of Economic Behavior & Organization, Elsevier, vol. 8(3), pages 333-337, September.
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