Stabilization Policy as Bifurcation Selection: Would Keynesian Policy Work if the World Really Were Keynesian?
The macroeconomic 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 macroeconomic model, since it is a second order differential equation system that has properties that are well suited to the purpose. The model's published point estimates are in the unstable region, and the model's Keynesian frictions provide the opportunity for Pareto-improving stabilization policy intervention. Under strongly simplifying assumptions intended to produce the least difficult bifurcation selection, we explore the problem of selecting a successful bifurcation policy to stabilize the system. Under assumptions designed to be most favorable to Keynesian stabilization policy, we find that policies that would produce successful bifurcation to stability 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.
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|Date of revision:||Sep 2012|
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