Chaotic Dynamics in Economics

by Jess Benhabib

2008, Palgrave Dictionary of Economics

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A new literature in the 1980s studied the possibility that endogenous cycles and irregular chaotic dynamics resembling stochastic fluctuations could be generated by deterministic, equilibrium models of the economy, in particular in overlapping generations models and in models with infinitely lived representative agents. Other empirical studies attempted to identify whether various economic time series were generated by deterministic chaotic dynamics or stochastic fluctuations. While dynamic equilibrium models calibrated to standard parameter values can generate chaotic dynamics and endogenous cycles even under intertemporal arbitrage and without market frictions, definitive empirical evidence for chaos in economics has not yet been produced.