Chaos theory may explain instability in U.S. economy | 1/24/2020 | Staff (Posted by) Level 4
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Jeff Goldblum's character in "Jurassic Park" famously popularized the concept of chaos theory as it relates to science. But one University of Kansas professor is applying that theory to the economy.

William Barnett, the Oswald Distinguished Professor of Macroeconomics, has co-written "Shilnikov Chaos, Low Interest Rates, and New Keynesian Macroeconomics." The research paper argues that an active monetary policy, using feedback to interest rates, may introduce a chaotic attractor, initiating long-term unpredictability in financial markets.

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"The puzzling decline in nominal and real interest rates over the past 20 years may not have been intentional," Barnett said.

"By attaching a Taylor interest-rate feedback rule to the macro economy's dynamics, the central bank inadvertently bifurcated the economy into Shilnikov chaos—which we have shown can produce drift of interest rates down to below their natural rate."

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Those familiar with "Jurassic Park" likely understand how chaos applies to the natural sciences, causing solution paths to wander in unplanned directions.

"In "Jurassic Park," dinosaurs unintentionally got out of control. That's possible from one kind of chaos. There could be another kind of chaos, which can do the opposite. It could cause the extinction of the dinosaurs. So that movie was assuming the existence of a particular kind of chaos, which had a very negative consequence," he said.

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But Shilnikov chaos (named for Russian mathematician Leonid Shilnikov) generates its own distinct kind of dynamical drift.

"We have found it can cause interest rates inadvertently to decline, even if not intended by the Federal Reserve," Barnett said.

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The KU professor explained that people often confuse this with something called catastrophe theory.

"In mathematics, catastrophe theory produces discontinuous jumps in solution paths. Chaos doesn't do that. It just produces jiggly, stochastic-appearing solutions that are not smooth—such as the weather, which is chaotic, never converges to a steady state and is not perfectly predictable," he said.


Although the concept...
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