Barnett, William and Bella, Giovanni and Ghosh, Taniya and Mattana, Paolo and Venturi, Beatrice (2021): Chaos in the UK New Keynesian Macroeconomy.
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Abstract
We study the stability properties and conditions for the onset of Shilnikov chaos in the UK New Keynesian macroeconomy, as well as the shifts in the equilibrium dynamics under various policy regimes. We find that Shilnikov chaos emerges for a restricted part of the free parameters space in the baseline rational expectations UK model with no regime switching. When the UK's central bank showed a weak response to inflation in the high inflation regime, the chaos did not occur at all. But Shilnikov chaos appears easily in the case of the lowinflation regime, which is associated with the Bank of England's use of aggressive monetary policy in recent years. Tightening the monetary policy interestratefeedback rule via the Taylor coefficient is one of the policy alternatives proposed by the local analysis for restoring uniqueness. We find that doing so accelerates the emergence of unanticipated phenomena such as Shilnikov's chaotic dynamics. Our results with UK data are thereby consistent with the results with US data by Barnett et al. (2021), who found that the adoption of an active interest rate feedback rule in recent years by the Federal Reserve produces Shilnikov chaos and unintentional downward drift in interest rates towards the lower bound. The source of the chaos and downward drift in interest rates is adoption of a myopic shortrun interestrate feedback rule without a terminal condition as long run anchor. A critical assumption of the results with US and UK data are existence of new Keynesian sticky prices. While the model’s parameters were calibrated with preBrexit data, we expect that our results will be highly relevant postBrexit, as the needed data become available. Changes in the geometry of the Shilnikov fractal attractor set can be expected to be revealing about changes in the level and nature of UK economic risk following Brexit.
Item Type:  MPRA Paper 

Original Title:  Chaos in the UK New Keynesian Macroeconomy 
Language:  English 
Keywords:  Shilnikov chaos criterion, longterm unpredictability, liquidity trap 
Subjects:  C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61  Optimization Techniques ; Programming Models ; Dynamic Analysis C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62  Existence and Stability Conditions of Equilibrium E  Macroeconomics and Monetary Economics > E1  General Aggregative Models > E12  Keynes ; Keynesian ; PostKeynesian E  Macroeconomics and Monetary Economics > E5  Monetary Policy, Central Banking, and the Supply of Money and Credit > E52  Monetary Policy E  Macroeconomics and Monetary Economics > E6  Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63  Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy 
Item ID:  110336 
Depositing User:  William A. Barnett 
Date Deposited:  01 Nov 2021 10:44 
Last Modified:  01 Nov 2021 10:44 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/110336 
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