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Stabilization Policy as Bifurcation Selection: Would Keynesian Policy Work if the World Really Were Keynesian?

  • William Barnett

    (Department of Economics, The University of Kansas)

  • Yijun He

    (Washington University in St.Louis)

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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File URL: http://www2.ku.edu/~kuwpaper/2009Papers/201228.pdf
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Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 201228.

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Length: 27 pages
Date of creation: Sep 2012
Date of revision: Sep 2012
Handle: RePEc:kan:wpaper:201228
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  1. Nieuwenhuis, Herman J. & Schoonbeek, Lambert, 1997. "Stability and the structure of continuous-time economic models," Economic Modelling, Elsevier, vol. 14(3), pages 311-340, July.
  2. repec:cup:cbooks:9780521484619 is not listed on IDEAS
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  11. Herbert E. Scarf, 1959. "Some Examples of Global Instability of the Competitive Equilibrium," Cowles Foundation Discussion Papers 79, Cowles Foundation for Research in Economics, Yale University.
  12. Stephanie Schmitt-Grohe, 1995. "Comparing four models of aggregate fluctuations due to self-fulfilling expectations," Finance and Economics Discussion Series 95-17, Board of Governors of the Federal Reserve System (U.S.).
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