Article ID Journal Published Year Pages File Type
1892593 Chaos, Solitons & Fractals 2015 13 Pages PDF
Abstract

The recent macroeconomic literature has been stressing the importance of considering heterogeneous expectations while addressing monetary policy. In this paper we consider a standard New Keynesian model, described by a two-dimensional nonlinear map, to analyze the bifurcation structure when agents have heterogeneous expectations and update their beliefs based on past performance. Depending on the degree of reactivity of the monetary policy to inflation and output deviations from the target equilibrium, different kind of dynamics may occur. We find that multiple equilibria and complicated dynamics, associated to codimension-2 bifurcations, may arise even if the monetary policy is set to respond more than point for point to inflation, as the Taylor principle prescribes. We show that if the monetary policy accommodates for a sufficient degree of output stabilization, complicated dynamics can be avoided and the number of coexisting equilibria reduces.

Related Topics
Physical Sciences and Engineering Physics and Astronomy Statistical and Nonlinear Physics
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