Robustness and Local Linearisation in Economic Models

2005

The paper weakens the orthodox argument that firm control of the money supply is sufficient to control the rate of inflation in the medium to long run. It argues that local linearisation is not the appropriate strategy for dealing with macroeconomic models: the global dynamics should be analysed, using simulation methods if necessary. The paper provides an example of how striking analytical (including policy) results may depend as much on the method of analysing a model as on the economic assumptions upon which it is based.

Environmental Modelling & Software, 2007

We discuss some issues and challenges facing economic modellers when confronted with data generated within a non-linear world. The pitfalls associated with the linearization of inherently non-linear models are raised and the concept of robustness defined and proposed as a property of scientifically valid models. The existence of chaos in economic time series is discussed and an example, using financial data, presented.

2004

Chaos (Woodbury, N.Y.), 2018

Journal of Evolutionary Economics, 2017

The Journal of Finance, 1991

SSRN Electronic Journal, 2015

We examine the inter-linkages between financial factors and real economic activity. We review the main theoretical approaches that allow financial frictions to be embedded into general equilibrium models. We outline, from a policy perspective, the most recent empirical papers focusing on the propagation of exogenous shocks to the economy, with a particular emphasis on works dealing with time variation of parameters and other types of nonlinearities. We then present an application to the analysis of the changing transmission of financial shocks in the euro area. Results show that the effects of a financial shock are time-varying and contingent on the state of the economy. They are of negligible importance in normal times but they greatly matter in conditions of stress.

Journal of Monetary Economics, 1988

In an attempt to resolve the controversies that exist within the field of economics regarding nonlinearity, chaos, and bifurcation, we investigate the relevancy to these controversies of a controlled competition among nonparametric econometric tests for nonlinearity and chaos, and we also report on our results with experiments using parametric macroeconomic models to investigate the implications of bifurcation for macroeconomic policy. These experiments are part of an ongoing research project. What we find so far is that existing views on nonlinearity, chaos, and bifurcation in economics are based upon oversimplified views that currently neither can be confirmed nor contradicted with empirical results that are now available. Since these issues are deep and difficult, considerably more research is needed before any serious conclusions on the subject can be stated with confidence. This fact is particularly true regarding the relevancy of nonlinearity, chaos, and bifurcation for macroeconomic stabilization policy.

Chaos, Solitons & Fractals, 2001

In this paper a discrete-time economic model is considered where the savings are proportional to income and the investment demand depends on the dierence between the current income and its exogenously assumed equilibrium level, through a nonlinear S-shaped increasing function. The model can be ultimately reduced to a two-dimensional discrete dynamical system in income and capital, whose time evolution is``driven'' by a family of two-dimensional maps of triangular type. These particular two-dimensional maps have the peculiarity that one of their components (the one driving the income evolution in the model at study) appears to be uncoupled from the other, i.e., an independent one-dimensional map. The structure of such maps allows one to completely understand the forward dynamics, i.e., the asymptotic dynamic behavior, starting from the properties of the associated one-dimensional map (a bimodal one in our model). The equilibrium points of the map are determined, and the in¯uence of the main parameters (such as the propensity to save and the ®rms' speed of adjustment to the excess demand) on the local stability of the equilibria is studied. More important, the paper analyzes how changes in the parameters' values modify both the asymptotic dynamics of the system and the structure of the basins of the dierent and often coexisting attractors in the phase-plane. Finally, a particular``global'' (homoclinic) bifurcation is illustrated, occurring for suciently high values of the ®rms' adjustment parameter and causing the switching from a situation of bi-stability (coexistence of two stable equilibria, or attracting sets of dierent nature) to a regime characterized by wide chaotic oscillations of income and capital around their exogenously assumed equilibrium levels. Ó : S 0 9 6 0 -0 7 7 9 ( 0 0 ) 0 0 0 5 5 -2