Stabilization Policy as Bifurcation Selection Would Stabilization Policy Work if the Economy Really Were Unstable?

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Issue Date
2002-11-01Author
Barnett, William A.
He, Yijun
Publisher
Cambridge University Press
Type
Article
Article Version
Scholarly/refereed, author accepted manuscript
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Show full item recordAbstract
Taken literally, the 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 macroeconometric model. Under assumptions designed to be most favorable to stabilization policy, we find that policies that would produce successful bifurcation 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. In fact, an economy that is dynamically stable without policy, but subject to stochastic shocks, could be bifurcated to instability with imposition of a poorly designed “stabilization” policy.
Description
This is the author's final draft of an article which is available in its originally published version from: http://dx.doi.org/10.1017/S1365100502020023
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Citation
Barnett, William A. and He, Yijun "Stabilization Policy as Bifurcation Selection: Would Stabilization Policy Work if the Economy Really Were Unstable?," with Yijun He, Macroeconomic Dynamics, vol 6, no 5, November 2002, pp. 713-747. http://dx.doi.org/10.1017/S1365100502020023
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