Lecture Notes in Economics and Mathematical Systems

Hans-Walter Lorenz

Nonlinear Dynamical
Economics and
Chaotic Motion
Lecture Notes
in Economics and
Mathematical Systems
Managing Editors: M. Beckmann and W. Krelle

334

Hans-Walter Lorenz

Nonlinear Dynamical Economics

and Chaotic Motion

Springer-Verlag
Berlin Heidelberg GmbH
Editorial Board

H. Albach M. Beckmann (Managing Editor) P. Dhrymes

G. Fandel G.Feichtinger J.Green W.Hildenbrand W.Krelle (Managing Editor)
H. P. Kunzi K. Ritter R. Sato U. Schittko P. Schonfeld R. Selten

Managing Editors

Prof. Dr. M. Beckmann

Brown University
Providence, Rl 02912, USA

Prof. Dr. W. Krelle

lnstitut fUr Gesellschafts- und Wirtschaftswissenschaften
der Universitat Bonn
Adenauerallee 24-42, D-5300 Bonn, FRG

Author

Dr. Hans-Walter Lorenz

Volkswirtschaftliches Seminar
Georg-August-Universitat Gi:ittingen
Platz der Gi:ittinger Sieben 3, D-3400 Gi:ittingen, FRG

ISBN 978-3-540-51413-8 ISBN 978-3-662-22233-1 (eBook)

DOI 10.1007/978-3-662-22233-1

This work is subject to copyright. All rights are reserved, whether the whole or part of the material
is concerned, specifically the rights of translation, reprinting, re-use of illustrations, recitation,
broadcasting, reproduction on microfilms or in other ways, and storage in data banks. Duplication
of this publication or parts thereof is only permitted under the provisions of the German Copyright
Law of September 9, 1965, in its version of June 24, 1985, and a copyright fee must always be
paid. Violations fall under the prosecution act of the German Copyright Law.
©Springer-Verlag Berlin Heidelberg 1989
Originally published by Springer-Verlag Berlin Heidelberg New York 1989

2142/3140-54321 0
To My Parents
... only nonlinear differential equations have interesting dynamics.

M. Hirsch ( 1984)
Preface

The plan to publish the present book arose while I was preparing a joint work with
Gunter Gabisch (Gabisch, G./Lorenz, H.-W.: Business Cycle Theory. Berlin-Heidel-
berg-New York: Springer). It turned out that a lot of interesting material could only be
sketched in a business cycle text, either because the relevance for business cycle theory
was not evident or because the material required an interest in dynamical economics
which laid beyond the scope of a survey text for advanced undergraduates. While much
of the material enclosed in this book can be found in condensed and sometimes more
or less identical form in that business cycle text, the present monograph attempts to
present nonlinear dynamical economics in a broader context with economic examples
from other fields than business cycle theory.
It is a pleasure for me to acknowledge the critical comments, extremely detailed
remarks, or suggestions by many friends and colleagues. The responses to earlier versions
of the manuscript by W.A. Barnett, M. Boldrin, W.A. Brock, C. Chiarella, C. Dale,
G. Feichtinger, P. Flaschel, D.K. Foley, R.M. Goodwin, D. Kelsey, M. Lines, A. Medio,
L. Montrucchio, P. Read, C. Sayers, A. Schmutzler, H. Schnabl, G. Silverberg, H.-\'\!. Sinn,
J. Sterman, and R. Tscherning not only encouraged me to publish the book in its present
form but helped to remove numerous errors (not only typographic ones) and conceptnal
misunderstandings and flaws. Particular thanks go to G. Gabisch who initiated my
interest in nonlinear dynamics and encouraged the writing of this text. A . .Johnson
and R. Phillips copy-edited parts of the text and helped to remove many misleading
formulations and stylistic shortcomings. It seems to be unnecessary to stress that all
VIII

remaining errors will debit my personal account.

Large parts of the manuscript were written while I was visiting the University of
Southern California. Without the inspiring environment of the Modelling Research
Group and the extraordinary help of the staff the book would not have been completed
in due time.
The work was partly supported by the Deutsche Forschungsgemeinschaft. The final
manuscript was typeset in PC1E;X.

Gottingen, March 1989 Hans-Walter Lorenz

Contents

Introduction 1

1. Economic Dynamics, Linearities, and the Classical Mechanistic

Worldview 5

1.1. Some Reflexions on the Origin of Dynamical Economics 5

1.2. Linearities in Dynamical Economics 15
1.2.1. Basic Properties of Linear Dynamical Systems 16
1.2.2. The Dominance of Linear Dynamical Systems in Economics 24

2. Nonlinearities in Dynamical Economics 31

2.1. Preliminary Concepts 32
2.2. The Poincan~-Bendixson Theorem 39
2.2.1. The Existence of Limit Cycles 39
2.2.2. The KcJdor Model as a Prototype Model in Nonlinear
Dynamical Economics 42
2.3. The Uniqueness of Limit Cycles 46
X Contents

2.3.1. The Lienard Equation 47

2.3.2. Unique Cycles in a Modified Phillips Model 48
2.4. Predator-Prey Models 51
2.4.1. Center Dynamics in Conservative Dynamical Systems 51
2.4.2. Goodwin's Predator-Prey Model of the Class Struggle 57
2.4.3. Predator-Prey Structures in Dissipative Systems 60
2.5. Irreversibility and Determinism in Dynamical Systems 61

3. Bifurcation Theory in Dynamical Economics 64

3.1. Local Bifurcations in Continuous-Time Dynamical Systems 65
3.1.1. Fold, Transcritical, and Pitchfork Bifurcations 66
3.1.2. The Hopf Bifurcation in Continuous-Time Dynamical Systems 75
3.1.2.1. The Hopf Bifurcation in Business Cycle Theory 82
3.1.2.2. Closed Orbits in Optimal Economic Growth 87
3.2. Local Bifurcations in Discrete-Time Dynamical Systems 91
3.2.1. Fold, Transcritical, Pitchfork, andFlip Bifurcations 91
3.2.2. The Hopf Bifurcation in Discrete-Time Dynamical Systems 96

4. Chaotic Dynamics 100

4.1. Chaos in Discrete-Time Dynamical Systems 103
4.1.1. Basic Concepts 103
4.1.2. Chaos in Descriptive Growth Theory 119
4.1.3. Chaos in Discrete-Time Models of Optimal Economic Growth 124
4.1.4. Other Economic Examples 128
4.1.5. Chaos in Higher-Dimensional Discrete-Time Systems 129
4.2. Chaos in Continuous-Time Dynamical Systems 135
4.2.1. Basic Ideas 135
4.2.2. The Coupling of Oscillators 143
4.2.3. The Forced Oscillator 151
4.2.4. Homoclinic Orbits and Spiral-Type Attractors 162

5. Numerical Tools 175

5.1. Spectral Analysis 176
5.2. Dimension, Entropy, and Lyapunov Exponents 179
 Contents XI

5.2.1. Phase Space Embedding 179

5.2.2. Fractal Dimensions 181
5.2.3. Correlation Dimension 184
5.2.4. Lyapunov Exponents 186
5.2.5. Kolmogorov Entropy 191
5.2.6. Summary 193
5.3. Are Economic Time Series Chaotic? 195
5.4. Predictability in the Face of Chaotic Dynamics 201

6. Further Topics in Nonlinear Dynamical Economics 203

6.1. The Adiabatic Approximation 203
6.2. Catastrophe Theory 205
6.2.1. Basic Ideas 205
6.2.2. The Kaldor Model in the Light of Catastrophe Theory 211
6.2.3. A Catastrophe-Theoretical Approach to Stagflation 213

7. Concluding Remarks 216

References 220

Name Index 239

Subject Index 244

Introduction

The history of economic science abounds in examples of the emergence and decline of
fashionable trends in economic thought. Basic and paradigmatic attitudes toward the
conceptual understanding of an economy, concentrations on specific classes of economic
models which are believed to be an optimal reflection of economic reality, or the usage
of formal or verbal techniques whose applications are believed to provide new insights
into existing paradigms have rarely gained lasting serious attention over the decades.
It is this transitoriness which allows to assign many textbooks and monographs to a
certain era.
In order for a discipline to be considered a serious scientific field, a standard collec-
tion of ideas, methods and concepts has to emerge over the decades which is accepted by
the majority of scientists in that field and which is not easily vulnerable to the challenge
of fashionable and short-lived trends. These scientific fundamentals of economics are
characterized by two essential properties:

• The foundation of modern economics dates back to the 18th century and has not
undergone a drastic restructuring in the subsequent years. Unlike other disciplines
in which the emergence of a new set of ideas has had revolutionary effects on
the development of the field (e.g., consider the changes arising in biology with
evolution theory, or quantum mechanics' revolutionary effect in physics), scientific
progress in economics seems to consist mainly in refinements and/or modifications
(as sophisticated they may be) of accepted central theories.
2 Introduction

• The formal apparatus of mainstream economics is borrowed from mathematics and

the natural sciences, especially from physics. Abstracting from the tight connec-
tions between mathematical statistics and econometrics, economics has only rarely
contributed to the advances of formal science and has adapted itself to existing
formalisms.

Modern economic theory not only has its heritage in but also continues to employ the
ideas of classical and neoclassical economists of the 18th and 19th century. Classical
and neoclassical economics emerged in a scientific environment that was dominated by
the grandiose inventions of classical physics and tremendous advances brought through
the application of classical mechanics to engineering problems. The mechanistic weltan-
schauung that characterized scientific thought in many different disciplines at least until
the turn of the century postulates a deterministic framework in which empirically ob-
servable phenomena follow strict and well-defined laws comparable to Newton's famous
basic laws of gravitation. If the involved laws are precisely known, predictions on the
outcome of a process can be made with the same precision. The task of the scientist
therefore remains to uncover these immanent rules. The writings of Walras, Marshall,
Jevons, or Pareto are dominated by the attempt to find these immanent rules in eco-
nomic activities and to formalize them in the way of classical mechanics. A major part
of microeconomic theory and welfare economics, whose invention is usually attributed to
these authors, is characterized by the attempt to explain human behavior deterministi-
cally from assumed preference orderings and associated optimization procedures which
resemble methods of mechanical or engineering problem solving. This basic attitude
toward an understanding of economic life has obviously survived until today and will
probably persist as the mainstream paradigm of economic thought for years to come.
This characterization of economic theory is not an attempt to classify economics as
a dependance of other more advanced sciences. Due to its character as a discipline which
has to rely more than other practical sciences on abstract thought experiments, and in
which measurement procedures depend more than in other fields on theoretical reflex-
ions, economics obviously has not experienced incentives strong enough to necessitate
any drastic modifications of its formal apparatus and conceptual framework. Further-
more, it may be argued that advances made in several natural sciences such as biology,
physics, and chemistry simply have had no relevance to economic theory.
During the last two or three decades several of the natural sciences have expe-
rienced increasing efforts to diverge from their immanent heritage in the mechanistic
weltanschauung, which continues to prevail in many other disciplines. While qualita-
tive advances made in physics like the development of quantum mechanics, relativity
theory, and thermodynamics already suggested a basic failure of classical mechanics as
early as around the beginning of this century, a formal phenomenon seems to initiate a
divergence from the mechanistic attitude in other disciplines as well. The mathematical
discovery of chaotic or irregular dynamical systems has initiated a renewed interest in
 Introduction 3

nonlinear dynamics, which do not simply constitute some kind of a generalization of

known linear systems, but which indeed concern the very conceptual framework of an
understanding of actual phenomena. As will be demonstrated at some length below,
the mechanistic worldview can be referred to as the linear worldview, and the concept
of nonlinearities can have dramatic effects on the capability to predict the behavior of
even simply structured dynamical models.
With unusual immediacy, new results on the effects of nonlinear dynamical sys-
tems in experimental mathematics, physics, chemistry, and biology have been promptly
applied to dynamical economics, though these early works were surely outside main-
stream theorizing. Meanwhile, an impressive list of publications now exists, indicating
that nonlinear systems with chaotic properties are not untypical in economics. This
book attempts to introduce the basic concepts of chaotic dynamical systems and to
familiarize the reader with the existing literature. Furthermore, the aim of the book
consists in activating interest in the consequences of the presence of nonlinearities for
economic theory's conceptualization of reality.
As was mentioned above, theories and concepts come and go in scientific life, es-
pecially in fields of applied philosophy like sociology or economics. Whether the chaos
property of some dynamical systems will indeed revise the mainstream paradigm, or
whether it will be shown that it is only a marginal curiosity in dynamical economics can
be determined only by scientific progress. In any case, chaotic dynamics constitute an
exciting example of how complicated some dynamical systems may be, although they
may at first seem to be qualitatively identical with well-known regular systems.
Naturally, this book is not an essay on the purely mathematical aspects of nonlinear
dynamical systems. It is designed as a survey of recent developments in dynamical
systems theory and its economic applications. It is the aim of the book to familiarize
economists with the existing literature in dynamical systems theory, and not to provide
a satisfactory overview from a mathematical point of view. Thus, the interested reader
will be referred to the genuine mathematical literature for all proofs of the mentioned
theorems and for a deeper mathematical understanding.
The book is organized as follows: Chapter 1 attempts to demonstrate that the gen-
eral attitude of dynamical economics toward reality is an inheritance from the mech-
anistic worldview of the 18th and 19th century. The philosophically more educated
reader who is also familiar with the history of science is cordially requested to excuse
the excursion into a basically distinctive field which nevertheless is enlightening with
respect to several of the topics enclosed in this book. Chapter 1 also rttempts to il-
lustrate this determinism by a short survey of assumptions and methods in standard
dynamical economics which generally can be coined linear dynamics. The basic tools for
analyzing nonlinear dynamical systems are introduced in Chapter 2 and include topics
like the Poincare-Bendixson theorem, the uniqueness of limit cycles, and- as an exam-
ple of a conservative dynamical system - Goodwin's predator-prey model of the class
4 Introduction

struggle, which can be transformed into a dissipative dynamical system under certain
additional assumptions. Chapter 3 is devoted to a subject which is becoming more
and more important in dynamical economics, namely bifurcation theory. In addition
to the renowned Hop£ bifurcation, economic examples of other bifurcation types like
the transcritical, fold, or flip bifurcation are presented for discrete-time and continuous-
time systems. Chapter 4 constitutes the main chapter of this book. It contains a short
introduction to discrete-time, one-dimensional chaotic dynamics and provides examples
of these strange dynamics from several economic sub-disciplines. The mathematically
more sophisticated higher-dimensional chaos in discrete- and also continuous-time mod-
els is presented in separate sub-chapters which could be considered as an outline of
future research. Chapter 5 deals with the empirically most important question of es-
tablishing chaos in observed time series. Chapter 6 then presents an outline of further
topics whose relevance to the advance of dynamical economics may not seem to be ob-
vious but nevertheless merit special attention. Finally, some concluding remarks are
contained in Chapter 7.
Chapter 1

Economic Dynamics, Linearities, and the Classical

Mechanistic Worldview

1.1. Some Reflexions on the Origin of Dynamical Economics

Economics in its modern form was introduced as a serious and distinguished science dur-
ing the second half of the 18th century. Unlike earlier attempts to understand economic
phenomena (usually in the context of political economy like, e.g., mercantilism) the
writings of Adam Smith or David Ricardo constitute the first successful approaches to-
ward an abstract explanation of human economic behavior. One reason why economics
emerged as a science in that particular period surely has to do with the expansion of
capitalism in the advanced societies of that day and the increasing complexity of trade.
It is not surprising that economics as a modern science originated in Great Britain,
which not only is considered as the homeland of capitalistic production but which also
had been the dominant factor in international trade for more than 150 years. Much of
the early economists' interest was therefore devoted to the major economic subjects of
the day like the effects of international trade on the prosperity of the domestic economy. 1

1 In many cases, inquiries into international trade represent tbe renowned work of
6 Chapter 1

It cannot have been the political and economic environment of the late 18th and
early 19th century alone which stimulated an interest in focussing research on eco-
nomic problems and which initiated the development of economics into its present day
form (although the development of this science is inherently connected to the social
environment). There had been other events with similar importance to the economic
development of a political unit which had not initiated a comparable interest in eco-
nomic affairs. Economic considerations of, e.g., the mercantilistic policy in 17th century
France and other European countries were intimately connected through absolutistic
ideals of improving the welfare of the nation, occasionally incarnated in the personal
welfare of its emperor. Thus, the "economist" of the day was incorporated into the
national administration and was given no incentive to dwell upon his own independent
individualistic ideas and concepts.
This mercantilistic attitude in absolutistic nations came in conflict with the emer-
gence, popularization, and final success of the enlightenment movement in the 18th
century. The enlightenment's concentration on individualism, which laid the founda-
tions for capitalistic (and political) development in the advanced economies like Britain,
arose in an intellectual atmosphere dominated by the writings of Leibniz, Voltaire, Kant,
Newton and other enlightenment philosophers. Several of these authors who profoundly
reformed modern western thought (some of whom were probably the last generally ed-
ucated and interested scholars in modern history) were not only concerned with philo-
sophical questions of Being but also strongly interested in the natural sciences. The
enlightenment period of 18th century Europe has gained favorable retrospective inter-
est not exclusively due to its concentration on human affairs, but also from its successes
in the investigation of natural phenomena. Whereas scientific pioneers like Galileo,
Kepler, or Descartes had to recant their ideas or seek refuge, the 18th century was char-
acterized by an openness to enlightening ideas, probably because of the stringency of
the results of several authors and experimentalists in the natural sciences. The effects
that the writing of Voltaire or Newton had on the academic community of their day can
probably not be overestimated.
It was in this era of close ties of enlightenment philosophy to advances in the
natural sciences and political and economic development in which the writings of the
now classical economists were published. As educated academics, A. Smith or later
D. Ricardo and J. St. Mill must have been familiar with at least the general ideas of
enlightenment philosophy and the advances made in physics. Their work must have
been influenced, directly or indirectly, both by the political and social implications of
that philosophy, and also through its basic approach toward an understanding of natural
phenomena.

classical writers; for example, most economists will probably remember David Ri-
cardo mainly for his investigations of comparative cost advantages rather than for
his labor value theory.
 1.1. On the Origin of Dynamical Economics 7

Abstracting from several spectactular inventions, a major reason for the strong
impact of the natural sciences on daily life and the academic community consisted in
the fact that physics occurred as being a precise science in the sense that an experiment
with a careful description of the environment leads to unambiguous results. If the
environment does not change, an experiment's outcome will remain constant as well.
The hypothetical possibility of repeating an experiment infinitely often with the same
outcome laid the foundation for determining the physical constants and for deriving
basic laws of motion underlying the experiment. Once the laws of motion and the
physical constants are known, it is possible to predict the outcome not only of the
particular experiment from which they are derived, but also of related and qualitatively
similar events in general surroundings. If science would not have been characterized
by this ability to precisely predicting the outcome of physical processes, the major
inventions made in the 18th and 19th century would probably not have been possible
and physics may not have had any impact on other sciences at all.
At a relatively early stage in the development of classical mechanics the view was
expressed that the basic laws of motion constitute the essential dynamic principles of the
entire cosmos. In reflecting on the predictability question, Laplace wrote the following,
often quoted statement in 1776: 2
The present state of the system of nature is evidently a consequence of what it
was in the preceding moment, and if we conceive of an intelligence which at a given
instant comprehends all the relations of the entities of this universe, it could state
the respective positions, motions, and general affects of all these entities at any time
in the past or future.
Physical astronomy, the branch of knowledge which does the greatest honor to the
human mind, gives us an idea, albeit imperfect, of what such an intelligence would be.
The simplicity of the law by which the celestial bodies move, and the relations of their
masses and distances, permit analysis to follow their motion up to a certain point;
and in order to determine the state of the system of these great bodies in past or future
centuries, it suffices for the mathematician that their position and their velocity be
given by observation for any moment in time. Man owes that advantage to the power
of the instruments he employs, and to the small number of relations that it embraces
in its calculations. But ignorance of the different causes involved in the production of
events, as well as their complexity, taken together with the imperfection of analysis,
prevents our reaching the same certainty about the vast majority of phenomena. Thus
there are things that are uncertain for us, things more or less probable, and we seek
to compensate for the impossibility of knowing them by determining their different
degrees of likelihood. So it is that we owe to the weakness of the human mind one
of the most delicate and ingenious of mathematical theories, the science of chance or
probability.

In principle everything therefore follows deterministic rules. Either the human inca-
pability or technical restrictions prevent a complete comprehension of actual empirical

2 Quoted from CrutcbEeld et al. (1986).

8 Chapter 1

phenomena.
This determinism in the classical physical worldview is, however, only one aspect
of natural philosophy in the 18th and 19th century. Physics as the celebrated discipline
of natural philosophy represented a linear science in the following respects: 3

• A physical phenomenon can be isolated from the environment. The study of the
isolated (or de-coupled) physical systems and processes (for example in labora-
tory experiments) can provide a precise understanding of the problem's nature.
The abstraction from noisy surroundings during this isolation may reveal the pure
properties of a physical system.
• The interaction of different isolated phenomena occurs in an additive manner, i.e.,
it is dominated by the principle of superposition. This implies that "the most
general motion of a complicated system of particles is nothing more than a linear
superposition of the motions of the constituent elements. " 4
• If it is not possible to properly analyse all constituent elements of a given system,
perturbing an existing linear model (which was constructed by superposition) can
always explain the originally disregarded phenomena.

It can in fact be shown that the majority of the most important theoretical discoveries
in classical physics followed this procedure. The investigations of sound as a wave phe-
nomenon by Newton, Lagrange, and Laplace, or the findings on the vibration of strings
by D.Bernoulli, Lagrange, and Euler are good examples how a complex phenomenon was
separated into single elements which could be analyzed by means of simple techniques. 5
The tremendous success of the linear approach in explaining natural phenomena
in mechanical, celestial, optical, etc. problems constituted a stimulant for the newly
emerging branches of philosophical thinking in the 19th century. The isolation technique
and the attitude toward the predictability problem began to become influential in the
social sciences as well. While, as was pointed out by Crutchfield et al. (1986), a direct
application of Laplace's statement on predictions to human affairs implies that no free
human will exists at all, the philosophical development incorporated this idea in a
somewhat hidden manner. Hegel's philosophy of history, and later Marx's deterministic
laws of economic and social development, indicated that in the course of the 19th century
a tendency to compare the overall effects of human action with qualitatively the same
kind of laws of motion, which had been applied to the natural sciences, emerged. The

3 Cf. West (1985), p. 70.

4 West (1985), p. 70.
5 Cf. West (1985), pp. 68 ff. for a short survey. It is remarkable that Euler personally
rejected the superposition principle though be actually proved its correctness in the
case of the wave equation.
 1.1. On tbe Origin of Dynamical Economics 9

philosophical attitude of the early 19th century was dominated by an entity called
weltgeist which constituted a surrogate for the legislation of the medieval universe: the
determinism of classical physics, idealistic philosophy, or Marxian sociology began to
replace the theological notion of a divine predestination of human life.
If no truly free human will exists, it is possible to generalize individual human
behavior and to abstract from singular phenomena based in the isolated minds of human
beings. It is therefore possible to describe the actions of an individual according to
typical patterns of behavior, provided he is not characterized by pathological attitudes
toward reality.
This idea that individuals behave to some degree according to typical patterns
constitutes the essential prerequisite in establishing economics as a scientific branch.
Typical patterns of economic behavior were introduced to economics by means of a
rather simple approach; for example, if the rationale of a typical agent consists in
maximizing a predetermined utility function which lacks psychological or sociological
considerations, the fundamental problem of explaining individual economic behavior is
replaced by the assumption of individuals acting rationally, i.e., maximizing utility, in a
given environment. What has later been termed the axiomatic foundation of economics
is basically nothing more than the hypothetical determination offundamental behavioral
laws from which most results in economics follow tautologically, though usually not
obviously.
This determination of fundamental behavioral patterns by hypotheses, which ap-
peared (and still appear) to be reasonable, circumvented the basic problem of studying
individuals acting within an economy and cleared path toward a precise economic sci-
ence, which resembles a strong similarity with classical physics as the most advanced
science in the 18th and 19th centuries. While this similarity of emerging economics to
physics was probably only vaguely evident to classical writers until the mid-19th cen-
tury, the beginning of the mathematical formalization of economics in the second half
of that century let economics appear either as a transformation of physical methods
to problems of human life or as an application of mathematics, with a status equal
to physics. The predecessors of modern mathematical economics, e.g., L. Walras, W.S.
Jevons, and V.Pareto, were not only aware of the similarity, but propagated the use of
the methods of physics in economics. 6 It seems as if the representatives of the Lausanne
School considered physics as a scientific idol among applied sciences, which is supported
by the fact that some of them were not educated economists, but had their academic
origin in mathematics or in engineering sciences. 7 Walras repeatedly mentioned his aim

6 Tbe standard reference for questions concerning tbe relation between physics and
economics is, of course, Georgescu-Roegen (1971).
7 V. Pareto bad a doctoral degree in railroad engineering and, like bis predecessor L.
Walras in Lausanne, bad not published mucb on economic tbeory wben be got bis
10 Chapter 1

to structure economics in a manner similar to physics 8 and claimed that the classical
and pre-classical writers were already implicitly guided by the same idea: 9

... the theory of price determination of economic goods or the pure economic theory
appears (to have) the character of a real, namely physico-mathematical science. . ..
Isn't it true that all those English economists from Ricardo to J.S. Mill have treated
pure economics like real mathematics? Their sole error ... was that they attempted
to develop this branch of mathematics by means of common everyday-language and
that they could handle it therefore only with difficulties and without complete success.
. .. I ... have been concerned with the development of pure economics as a physico-
mathematical science for several years.

!.Fisher wrote in his 1891 doctoral thesis: 10

Scarcely a writer on economics omits to make some comparison between economics

and mechanics. One speaks of a "rough correspondence" between the play of "eco-
nomic forces" and mechanical equilibrium. . .. In fact the economist borrows much
of his vocabulary from mechanics. Instances are: Equilibrium, stability, elasticity,
expansion, inflation, contraction, flow, effiux, force, pressure, resistance, reaction,
distribution (price}, levels, movement, friction.

Walras, like Pareto, Cournot, and other early mathematical economists, attempted to
develop a logically consistent edifice of thought. They clearly saw the restrictions of
abstract thought experiments and therefore insisted on a separation of the categories of
pure and applied economics. It is certainly inappropriate to claim that they considered
real economies as systems which behave completely analogously to a physical system.
Concerning the modelling of economic systems in pure economics, however, physics did
not only serve as a paragon of the useful exploitation of mathematics as an instrument
in developing a logically consistent theory. In addition to the adoption of its formal
methodological approach, physics provided the basic qualitative foundations of scientific

first academic appointment. However, Debreu's (1986) statement that Walras and
Pareto had published only novels and other belletristic literature before their first
appointments is misleading.
8 Walras' German translator, L. v. Winterfeld, compared Walras with the astronomer
J. Kepler: "... Walras appears to me as the Kepler of economics, who incontestably
and for all time proves the laws which once were suspected and expressed by (the)
German scholar ... H.H. Gossen in the style of a Kopernikus." Own translation
from the German preface to Walras (1876) (H.- W.L.)
9 Walras (1874), p. 7. Own translation (H.- W. L.) from Walras (1876).
1 ° Cf. Fisher (1961), p. 25. Fisher himself attempted to develop a consistent value
theory analogous to the theory of equilibrating water cisterns. He even constructed
mechanical devices to illustrate his ideas.
 1.1. On the Origin of Dynamical Economics 11

economics. As was mentioned above, the deterministic and mechanistic worldview of

physics in the 19th century dominated not only the internal scientific community but also
had a widespread influence on other disciplines and also on the public weltanschauung.
Much in the spirit of Laplace's statement, economic systems were therefore considered
as systems whose development could be calculated with preciseness if an appropriate
degree of information about the structure, the parameters, and the initial values of the
systems were provided to the economist.
This favoring of a methodological approach derived from physics is most clearly
evident in a statement made by J.St. Mill, published in 1843, which shows that physics
was not only favored by mathematically educated scholars like Walras or ParetoY

The phenomena with which this science is conversant being the thoughts, feelings,
and actions of human beings, it would have attained the ideal perfection of a science
if it enabled us to foretell how an individual would think, feel, or act, throughout life,
with the same certainty with which astronomy enables us to predict the places and the
occultation of the heavenly bodies. It need scarcely be stated that nothing approaching
to this can be done. .. . This is not, however, because every person's modes of thinking,
feeling, and acting, do not depend on causes; ... (T)he impressions and actions of
human beings are ... the joint result of (the} circumstances and of the characters of
the individuals: and the agencies which determine human character are so numerous
and diversified, .. . , that in the aggregate they are never in any two cases exactly
similar. .. . Inasmuch, however, as many of those effects .. . are determined, ... it is
evidently possible to make predictions which will almost always be verified. .. . For
the purposes of political and social science this is sufficient.

It must be stressed, however, that the orientation of economics to the paradigms and
methods of physics was already being questioned by economists who are nowadays
categorized as the founders of deterministic (neo )-classical economics. 12 A. Marshall
repeatedly drew attention to the idea that the appropriate fellow-discipline in the natural
sciences which is most closely analogous to economics (as far as the subject of the field
is concerned) is not physics but biology: 13

.. . the forces of which economics has to take account are more numerous, less
definite, less well known, and more diverse in character than those of mechanics . ...

11 Mill (1973), pp. 847£., emphases in original. For the purpose of this little excursion
into the history of science, Mill's Logic can be considered as the gap filling con-
tribution between enlightenment philosophy, the methodology of the subsequent
development of classical mechanics, and the methodology of economics and other
social sciences.
12 Compare, e.g., Blaug (1978), p. 311, for the resistance to the emerging mathemat-
ical methods among well-reputed economists.
13 Marshall (1938), p. 772.
12 Chapter 1

economics, like biology, deals with a matter, of which the inner nature and constitu-
tion, as well as the outer form, are constantly changing. .. . If however we look at
the history of such strictly economic relations as those of business credit and bank-
ing, of trade unionism or co-operation, we see that modes of working, that have been
generally successful at some times and places, have uniformly failed at others. The
difference may sometimes be explained simply as the result of variations in general
enlightment, or of morol strength of charocter and habits of mutual trust. But often
the explanation is more difficult.

Aside from this general reflexion, Marshall nevertheless considered physics as a science
which can serve as a paragon in respect to both the formal apparatus and the involved
worldview. Marshall's general understanding of economics as a subdiscipline of natu-
ral philosophy and especially Walras's concentration on the mathematical methodology
have, in the scientific spirit of the last century, survived in mainstream economics until
recently. 14 A majority of the topics covered by modern mathematical economics, es-
pecially in the general equilibrium framework, still deal with the same problems which
interested classical economists like Walras 15 , and it is this tradition inherited from the
classical writers, which still allows one to assign the term " mechanistic worldview" to
the majority of economic approaches.
The linear character of classical economics most clearly appears in the form of
partial theorizing, advocated as a fruitful technique in economics especially by A. Mar-
shall. Partial theorizing isolates an element of a complex system from its environment
and attempts to explain the element's behavior by considering the environment as ex-
ogenously given. If the entire system (the economy) does not change over time and
if only equilibrium constellations are investigated, this method can deliver useful ex-
planations of relations among endogenous variables provided that the parameter set
which reflects the influence of the exogenous surrounding is properly specified. How-
ever, if this parameter set is itself determined by partial analyses of other elements, no
consistent description of the entire system is possible. Economic theory dominated by
partial theorizing therefore does not attempt to specify the parameter set, but instead
considers what generally happens in a single element if the parameter set changes. This
comparative static procedure provides information on what can occur to the variables
in a single element but leaves unanswered the question what really happens.
The comparative static procedure makes sense only if a dynamic process indeed
implies a convergence of the variables to the calculated new equilibrium constellation.

14 Marshall's remark on the actual analogy between economics and biology is most
vividly incorporated in the so-called evolution economics which surely can be con-
sidered a discipline not in the mainstream of modern economics.
15 Indeed, to an outsider it may be surprising that economics still elaborates on auxil-
iary constructions like Walras' auctioneer, though the recent analytical techniques
are of course much more sophisticated than at Walras' times.
 1.1. On the Origin of Dynamical Economics 13

However, such a dynamic process in a single element, initiated by a change in the

parameter set, disregards any possible spillover effects of the endogenous variables on
the environment. If feedback processes were allowed, the assumption of an exogenous
parameter set would have to be abandonned and partial theorizing would loose its
grounds. Dynamic partial theory therefore implicitly assumes that the influence of
exogenous variables is neglectable and that no feedback processes exist.
The general equilibrium framework of, e.g., Walras incorporates linearity in a more
subtle way. The interdepencies of all (economic) variables are explicitly formulated,
and the proof of the existence of a simultaneous general equilibrium constitutes the
core of traditional mathematical economics. In a Walrasian framework, the dynamic
motion of an economy is described by the change of goods prices depending on the
excess demands on the associated markets. As the excess demands themselves depend
on all goods prices, all markets are indeed simultaneously considered. The standard
procedure to establish the (local) stability of the general equilibrium however reveals
the linear character of the analysis: the local stability depends on the n eigenvalues
of the linearized system. The method therefore reflects the superposition principle.
Global stability proofs in nonlinear Walrasian system naturally have to abandon the
linearization technique. Instead of turning to techniques in nonlinear dynamics, the
existing literature provides conditions under which the behavior of the nonlinear system
is qualitatively equivalent to a linear system.
This classical economic worldview may be summarized in the following set of as-
sumptions:

• There exists a rationale for each human action.

• Individual behavior (or the behavior of individuals in an economic unit like a mar-
ket) can be isolated from the economy as a whole.
• Human behavior can be described in terms of general behavioral patterns, such
that the analysis may indeed abstract from individual behavior.
• Individual human behavior is thus comparable to the physical laws of motion, it
is both regular and predictable. If the environment is known with preciseness,
individual behavior within that environment is deterministic.
• The behavior of a society consists of the additive actions of its members. The
principle of superposition implies that society as a whole does not differ from the
sum of the individual actions.

This linear economic worldview implies that an economy can be described by linear
(or quasi-linear) functional relations. It abstracts from the presence of unpredictable
(irrational) individual behavior, from restrictions in the environment, from non-additive
interdependencies between different individuals and/or actions, etc. Much progress has
been made since the days of the classical (neoclassical) writers with respect to the above
14 Chapter 1

mentioned and other limitations, but the dynamical aspects of the theory are still more
or less characterized by the same concentration on linear relations as was the case during
the first formalizations of the development of an economy over time.
While neoclassical economists were still argueing in terms of mainstream classi-
cal mechanics, a new way of thinking involving a drastically different attitude toward
reality eventually emerged in the natural sciences. Around the turn of the century,
advances made in the natural sciences and mathematics raised some doubt as to the
validity of the classical paradigm in certain instances. The development of relativity
theory or quantum mechanics with its unsharpness relation constituted a challenge of
classical mechanics, and it was shown that it keeps its validity only in the realm of usual
everyday experience. It is worthwhile to note that the relevance of new developments in
mathematics and physics either went unrecognized by the majority in the physics pro-
fession or was considered to be only marginally significant to mainstream science. Thus,
with mainstream science still elaborating on the classical mechanical paradigm, classical
economists should not be discredited for their attempts to adapt the methodology of
emerging formal economic theory to well-accepted paradigms.
Despite the fact that physics was still dominated by the classical paradigm at the
turn of the century, this does not mean that the public was not open to new ideas. In
fact, mathematicians like H. Poincare had attained a reputation over the decades which
initiated an uncountable number of honorary lectures, not only for the mathematical
community, but also for a broader public audience. For example, as early as 1908
Poincare stated in front of a general audience: 16
A very small cause which escapes our notice determines a considerable effect that
we cannot fail to see, and then we say that the effect is due to chance. If we knew
exactly the laws of nature and the situation of the universe at the initial moment,
we could predict exactly the situation of that same universe at a succeeding moment.
But even if it were the case that the natural laws had no longer any secret for us, we
could still only know the initial situation approximately. If that enabled us to predict
the succeeding situation with the same approximation, that is all we require, and
we should say that the phenomenon had been predicted, that it is governed by laws.
But it is not always so; it may happen that small differences in the initial conditions
produce very great ones in the final phenomenon. A small error in the former will
produce an enormous error in the latter. Prediction becomes impossible, and we have
the fortuitous phenomenon.

The very essence of Poincare's statement was not immediately realized in the math-
ematics community, though his work not only initiated research in several dynamical
phenomena but even still constitutes a challenge to recent mathematicians. It took more
than fifty years before some of the basic results of Poincare's work were exploited in a
pioneering, but generally unnoticed work of E.N. Lorenz. His inspection of a dynamical

16 Poincare (1908), p. 68. English translation from Poincare (1952), p. 76. I am

grateful to D. Farmer for providing this reference to me.
 1.2. Linearities in Dynamical Economics 15

system in the context of a meteorological phenomenon impressively demonstrated the

conceptual impossibility of precisely predicting a dynamical system's future develop-
ment without an absolutely precise knowledge of the system's parameters and its initial
values. It was left to the currently renowned work by Ruelle/Takens (1971) and Li/
Yorke (1975) to encourage a wide interest in nonlinear dynamics, which sometimes even
appears to be a fashionable scientific trend. 17
Indeed, the theoretical research of the 1970s in several disciplines, mainly in the
natural sciences, concentrated on the investigation of nonlinear systems. While non-
linear approaches have occasionally been enthusiatically adopted in some disciplines,
economics (at least mainstream economics) seems to be characterized by a general hes-
itancy in exploiting the (mathematically) new ideas. This may be explained by the fact
that linear dynamical systems are the appropriate environment for those economic ideas
whose origin dates back to the writings of the 19th century classical economists.
On the other hand, nonlinearities have been investigated for a long time in the minds
of those economists who have developed a more critical attitude toward the functioning
of a market economy. For the reader who is interested in recent developments in the
theory of nonlinear dynamical economics, it will probably be surprising which topics
had been selected and solved by economic writers like R. Goodwin many years before
the scientific community became aware of the importance of those nonlinearities. 18 It
is noteworthy, however, that the impetus for recent research on nonlinear systems in
economics originated once again in the natural sciences, this time with the sometimes
spectacular advances made in the analysis of practical physical or biological phenomena.
The following section attempts to explain why mainstream economics still concen-
trates on linear models though the foundations of nonlinear economics were laid more
than forty years ago.

1.2. Linearities in Dynamical Economics

Before discussing the importance of linearities in dynamical economics, it is useful to

recall the possible dynamical behavior in these systems. It should become obvious that
the number of different types of behavior is limited and that the linear character of the
systems naturally suggests a concentration on the stability of equilibria.

17 Of course, this does not mean that in the course of the century there was no
mathematical progress in the theory of nonlinear dynamical systems. Indeed, re-
laxation oscillations, for example, were intensively discussed in the 1920s. The
work of Cartwright, Levinson, and Littlewood in the late 1940s actually laid the
foundations for the recent analysis of chaotic dynamical systems.
18 Cf. Harcourt (1984) or Velupillai/Ricci (1988) for honory lectures on Goodwin's
work.
16 Chapter 1

1.2.1. Basic Properties of Linear Dynamical Systems

Most existing dynamical economic models are framed in linear difference or differential
equation systems. 19 In the following presentation a very short survey of the dynamical
phenomena observable in these systems will be outlined. This section does not claim to
be complete, 20 but is intended as a reminder of the most important dynamical phenom-
ena. It concentrates on those aspects of linear systems which are especially interesting
in comparison with analogous nonlinear systems. As some important qualitative differ-
ences exist between continuous-time and discrete-time dynamical systems, they will be
presented separately.

Continuous-time Systems

Consider ann-dimensional, linear, continous-time, dynamical system with constant co-

efficients
x1(t) = aux1(t) + + alnXn(t) + C1
x2(t) = a21xl(t) + + a2nXn(t) + C2
(1.2.1)

or, in vector notation,

x(t) = Ax(t) + c, X ERn, (1.2.2)

with x(t) = dx(t)jdt, A as then x n matrix

(1.2.3)

and c as an n-dimensional column vector of constants.

19 The few economic models which make use of differential equations with fixed delays,
i.e., mixed difference-differential equations, will be ignored in the sequel.
20 Extensive treatments of linear dynamical systems with many economic examples
can be found, e.g., in Allen (1963), Chapters 5 and 6, Takayama (1974), or Gandolfo
(1983). See also Hirsch/Smale (1974), Chapters 3 and 4. As most of the following
subjects can be found in all of these standard references, detailed sources are rarely
provided in this section.
 1.2.1. Basic Properties of Linear Dynamical Systems 17

Consider first the simplest case with n = 1 and c = 0, 1.e., the homogeneous,
one-dimensional differential equation

x(t) = ax(t). (1.2.4)

Equation (1.2.4) can be solved explicitly, namely

x(t) = x(O)eat. (1.2.5)

Obviously, for, e.g., x(O) > 0, x( t) permanently increases (decreases) if a > 0 ( < 0). If
a= 0, x(t) stays at x(O) Vt.
If c -j. 0, the solution to the one-dimensional, non-homogeneous differential equation

:i:(t) = ax(t) +c (1.2.6)

becomes
x(t) = (x(O)- x*)eat + x*, (1.2.7)

where x* represents the equilibrium value of (1.2.6), i.e., the value of x which solves
0 = ax(t) +c. If (x(O)- x*) -j. 0, x(t) converges to (diverges from) the equilibrium
value x* if a < 0 (> 0). In both cases (1.2.4) and (1.2.6), the dynamic behavior of the
equations is characterized by monotonically increasing or decreasing values of x.
Second, consider the case n = 2 and c = 0. The system of two linear differential
equations can easily be transformed into a second-order differential equation. Differ-
entiating the first equation with respect to time and substituting for x2 and x 2 leads
to
(1.2.8)

Obviously, the coefficients of xi and XI are the determinant and the negative value of
the trace of the coefficient matrix A= {a;j}; i,j = 1,2, respectively. The solution of
(1.2.8) is given by 2 I
(1.2.9)

with m; as constants determined by the initial values of XI and ,\; as the eigenvalues of
A, i.e., the solutions of the equation lA - .\II = 0, where I is a 2 x 2-identity matrix.
Thus, the eigenvalues are the solutions of

(1.2.10)

2I If the eigenvalues are identical, (1.2.9) must be replaced by xi(t) = (mi +tm 2 )e>-t.
18 Chapter 1

The coefficient of,\ is the negative value of the trace of A while the absolute expression
constitutes the determinant of A. The roots of (1.2.10) are therefore given by

,\I 2 = trA ± y'(trA)2 - 4detA.

(1.2.11)
' 2

Substituting for .X;, i = 1, 2, in (1.2.9) shows that these eigenvalues determine the
dynamical behavior of the system. Basically, two cases can be distinguished:
i) Real roots: The eigenvalues .XI, 2 in (1.2.11) are real when the discriminant, i.e.,
6. = (trA) 2 - 4 detA, is positive or equal to zero. Consider first the case of a positive
determinant, i.e., det A > 0, implying that both eigenvalues have the same sign. If
the trace of A is negative, both eigenvalues are negative, and the trajectory of the
system monotonically approaches a finite point (xi, x~). The point (xi, xi} is called a
stable node. If the trace is positive and both eigenvalues are positive, the trajectory
monotonically diverges to +oo or -oo, respectively. The system is said to possess an
unstable node. Second, if the discriminant is positive but det A < 0, the eigenvalues
are real and come in pairs of opposite sign. In that case the equilibrium is said to be
saddle point stable, i.e., the stable and unstable manifold which are asymptotes to all
trajectories intersect at the equilibrium point. The unstable and stable manifold of the
equilibrium are also called the separatrixes of the saddle.

ii) Complex roots: The case of complex eigenvalues is the most interesting one from
the point of view of dynamical systems theory. If det A > 0 and 6. < 0, the eigenvalues
are complex conjugate, i.e., they can be written as ,\I = a+ f3i and "X2 = a - f3i, with
a= trA/2, f3 = y'detA- (trA)2 /4, and i = J=T. If the real parts Re .X; are negative,
damped oscillations occur such that a finite value will be approached in the limit. This
value is called a stable focus of the system. If Re .X; is positive, the amplitude of the
oscillation will increase over time. In this case the system is said to have an unstable
focus. Finally, if Re ,\ equals zero, the amplitude of the oscillation will be constant over
time and the system is said to exhibit center dynamics or to be neutrally stable.

This last case of center dynamics corresponds with the so-called harmonic oscillator
which is especially important in classical mechanics: if the trace of the coefficient matrix
for n = 2 is zero, (1.2.8) is formally identical with

(1.2.12)

with was the frequency of the oscillations. The solution of (1.2.12) is x(t) = acos(wt+
t 0 ), with a> 0 as a constant depending on the initial values of XI and x 2 at t 0 . In this
case, every initial point (XI (0), x2 (0)) is located in a closed orbit, the amplitude a of
which is determined by the distance between the initial point and the equilibrium.
 1.2.1. Basic Properties of Linear Dynamical Systems 19

x2 x2

~!~ ~!~ --------4----------

?if~- /!!~ xl Xl
l.l.a: Stable Node l.l.b. Unstable Node

x2 x2

Xt xl
l.l.c: Stable Focus l.l.d: Unstable Focus

x2 x2

~!~
Xt
\rr- I
xl
l.l.e: Center l.l.e: Saddle Point

Types of Dynamical Behavior in Continuous- Time Dynamical Systems

Figure 1.1
20 Chapter 1

n=1 n=2 n2:2

Monotone a<O det A > 0; .X 1 ,2 E R; .X; E R;

Convergence .X1,2 < 0 .X; < 0 Vi .

Monotone a>O det A > 0; .X1,2 E R; .X; E R;

Divergence AI,2 > 0 .X; > 0 Vi.

Saddle Point impossible det A < 0; .X 1,2 E R; .Xi, .Xk E R Vj, k;

Stability .X 1 > 0; .X2 < 0 .Xi > 0; .Xk < 0 .

Converging impossible det A > 0; .X 1,2 E C; Aj E R; .Xk, -:\HI E C;

Oscillations Re .X1,2 < 0 .Xi < 0 1\ Re .Xk < 0
-
Diverging impossible det A > 0; .X1,2 E C; Aj E R; .Xk, .Xk+I E C;
Oscillations Re .X1,2 > 0 .Xi > ( <) 0; Re .Xk > 0

Steady impossible det A> 0; .X 1 ,2 E C; .Xi E R; .Xk, -:\HI E C;

Oscillations Re .X1,2 = 0 .Xi = 0; Re .Xk = 0

Dynamic Behavior in Linear Continuous-Time Systems

Table 1.1

The different possible types of behavior in two-dimensional continuous-time dy-

namical systems are illustrated in Figure 1.1. The stable focus and the stable node are
also called sinks, while their unstable correspondents are called sources.
The case n > 2 is naturally more difficult to analyze. Nevertheless, some results
exist though it may be difficult to establish the presence of the following necessary and/
or sufficient conditions.
Consider the general system (1.2.1) with n > 2. If all eigenvalues .X; of (1.2.1), i.e.,
the roots of the determinant lA- .XII = 0 are real and negative, the system converges
monotonically toward a finite value of x. If there exists a pair of complex conjugate
eigenvalues .Xk, "Xk+I, the system oscillates with vanishing amplitude if the real parts
of all Ak E C and the real eigenvalues are negative. In both cases the system is called
asymptotically stable. Most of the literature on linear dynamical systems has concen-
trated on establishing necessary and sufficient conditions for the existence of negative
real eigenvalues and of negative real parts of Ak. 22

22 Cf. Gandolfo (1983), pp. 248ff. or Hahn (1984), pp. 752 f. for details on different
 1.2.1. Basic Properties of Linear Dynamical Systems 21

If all eigenvalues are real and positive, the system diverges monotonically toward
+oo or -oo, respectively. Saddle point stability occurs if the eigenvalues are real and
are of opposite signs. If some eigenvalues are complex conjugate with positive real parts
the system oscillates with increasing amplitude. It depends, however, on the sign of the
real eigenvalues whether the oscillation is superimposed on an exploding or converging
monotone trajectory. Steady oscillations with constant amplitude occur if the real parts
of the complex conjugate eigenvalues are zero.
The above mentioned dynamical phenomena in continuous-time linear dynamical
systems are summarized in Table 1.1.

Discrete-time Systems
The possible dynamical phenomena in linear, discrete-time dynamical systems are qual-
itatively more or less equivalent with some important differences especially in one-
dimensional systems. Consider an n-dimensional, linear, discrete-time dynamical sys-
tem with constant coefficients

+ a1nX~ + c1
+ a2nX~ + c2
(1.2.13)

or, in vector notation,

Xt+l = Axt + c, (1.2.14)

with A and c as defined in (1.2.3). Consider again first the simplest case n = 1 and
c = 0. The solution to the homogeneous first order equation

Xt+l = aXt (1.2.15)

IS

(1.2.16)

with xo as the initial value. For example, if x 0 > 0, x 1 increases (decreases) monotoni-
cally for a> 1 (0 <a< 1). If a= 1, x 1 stays at the initial point for all t.
If c =I 0, the solution to the non-homogeneous equation

(1.2.17)

techniques to establish negative real parts of the eigenvalues Ak.

22 Chapter 1

IS

Xt = ( Xo - X *) a t + X*, (1.2.18)

with x* as the equilibrium value of x, i.e., the value that solves (1.2.17) for Xt+l = Xt.
If (x 0 - x*) :f. 0, Xt converges to (diverges from) its equilibrium value monotonically if
0 <a< 1 (a> 1).
If a < 0, a phenomenon arises in both cases (1.2.15) and (1.2.17) which is not
possible in the analogous continuous-time systems, namely that Xt oscillates over time
in a sawtooth pattern. For -1 < a< 0, the oscillations are damped and Xt approaches
a finite value. If a < -1, the amplitude of the oscillations increases exponentially such
that Xt converges alternatively to +oo and -oo. Finally, if a = -1, Xt oscillates with a
constant amplitude.
Second, consider the case n = 2. As in the case of a continuous-time system,
the system of two one-dimensional difference equations can be transformed into the
second-order difference equation

(1.2.19)

The solution of (1.2.19) is given by 23

(1.2.20)

with m; and A;, i = 1, 2 having the same meaning as in (1.2.9). Depending on the sign
of the discriminant ~ = (trA) 2 - 4 detA, the eigenvalues A1 , 2 can be real or complex
numbers.
i) Real roots: The eigenvalues are real if the discriminant ~ is positive or equal to zero.
Depending on the values of det A and trA, the eigenvalues A; can be positive or negative.
An eigenvalue 0 < A; < 1 (A; > 1) implies a monotonic convergence (divergence) in one
of the two r.h.s. expressions in (1.2.20). An eigenvalue -1 < A; < 0 (,\; < -1)
implies a converging (diverging) sawtooth oscillation in one of the r.h.s. expressions
in (1.2.20). As both eigenvalues can have the same sign or can be of opposite sign,
a variety of possibilities exists for the linear combination (1.2.20) of solutions. If the
eigenvalues are distinct, the dominant root, i.e., the absolutely largest root, determines
the qualitative behavior of the system for t -+ oo. For example, if both eigenvalues
are positive and smaller than 1 (larger than 1 ), the system monotonically approaches a
finite value (monotonically diverges). If the eigenvalue A1 is positive and larger than 1
and if A2 is negative and larger than -1, the eigenvalue A1 is the dominant root. The

23 If both eigenvalues are identical the solution (1.2.20) must be replaced by x~ =

(m1 + tm2)At.
 1.2.1. Basic Properties of Linear Dynamical Systems 23

Im
(a, (3)

t-........
I
h-.
..,~lOr~
I ,,~
I .... ...,
........
Re

(a,-(3)

The Gaussian Plane

Figure 1.2

system is characterized by vanishing sawtooth oscillations around a divergent trend for

t large.
ii) Complex roots: When the discriminant is negative, the roots are complex conjugate
numbers. The system is characterized by converging oscillations with vanishing ampli-
tudes if the modulus of the complex eigenvalues is smaller than 1, i.e., mod .A; < 1. The
modulus of a complex number .A = o: + f3i is defined by the Euclidian distance between
the origin and the point ( o:, (3) in the Gaussian plane, i.e., mod = o: 2 + (3 2 ( cf. Figure J
1.2) Simple geometry implies that

.A1,2 = o: ± f3i =mod· (cos(}± i sinO), (1.2.21)

with (} as the angle between the distance line and the real axis. DeMoivre's theorem
implies that the solution (1.2.20) can be written as

Xt = m1.A~ + m2.A~
= m 1 (mod (cos(} + i sin 0)) t + m 2 (mod (cos(} - i sin 0)) t
=mod t(m 1 (cos0t + isinOt) + m2(cosOt- isinOt)) (1.2.22)
= mod t ( ( m 1 + m2) cos Ot + (m 1 - m2) i sin Ot)
= mod t { n 1 cos Ot + n 2 sin (}t ).

If the modulus is larger than 1, the amplitude of the system increases while Xt converges
in an oscillating manner if the modulus is smaller than 1. Steady oscillations occur if
the modulus equals 1.
Finally, consider the n-dimensional case. If all eigenvalues are real, the behavior
of the system is described by monotone convergence (divergence) if all eigenvalues are
smaller {larger) than 1. If some eigenvalues are complex conjugate, the system oscil-
lates. According to the magnitude of the modulus of the complex conjugate eigenvalues
24 Chapter 1

and the magnitude of the real eigenvalues the oscillations are exploding or damped,
superimposed on a converging or diverging trend of the trajectory in dependence on the
real eigenvalue.
Some important dynamical phenomena in discrete-time, linear dynamical systems
are summarized in Table 1.2. As was mentioned above, several other types of behavior
are possible in the real roots case when the eigenvalues have opposite signs and different
absolute values.

n=1 n=2 n~2

Monotone 0<a<1 .\1,2 E R; .\; E R;

Convergence .\1,2 < 1 \.\;\ < 1 Vi

Monotone a>1 .\1,2 E R; .\; E R;

Divergence .\1,2 > 1 \.\;\ > 1 Vi

Converging -1 <a< 0 detA > 0; .\1,2 E C; .\i E R; .\k, "Xk+1 E C;

Oscillations (Sawtooth) mod .\1,2 < 1 Aj < 1/\ mod Ak < 1
-
Diverging a< -1 detA > 0; .\1,2 E C; Aj E R; Ak,Ak+1 E C;
Oscillations (Sawtooth) mod .\1,2 > 1 mod Ak > 1
-
Steady a= -1 detA > 0; .\1,2 E C; Aj E R; .\k, Ak+1 E C;
Oscillations (Sawtooth) mod .\1,2 = 1 Aj=1/\mod.\k=1

Dynamic Behavior in Linear Discrete-Time Systems

Table 1.2

1.2.2. The Dominance of Linear Dynamical Systems in Economics

It is evident from this short survey that the behavior of linear dynamical systems can
be helpful only in determining the stability of the systems' equilibria. The divergent
behavior of the systems can be disregarded for qualitative economic reasons; that is, an
unbounded explosion of the dynamical systems implies a breakdown of the economy.
The permanent oscillation of the variables is possible only for a single constellation
 1.2.2. The Dominance of Linear Dynamical Economics 25

of the coefficients aii in the continuous- as well as in the discrete-time case. Thus,
linear dynamical systems in economics can serve mainly to establish the necessary and
sufficient conditions for the stability of the equilibria in the sense of a monotonic or
oscillating approach of the trajectories toward the equilibria.
As linear systems dominate dynamical economics, the question arises what the
reasons for this concentration on a limited set of hypothetically possible dynamical
phenomena are. Basically, two types of answers to this fundamental question can be
distinguished.
i) Compared with some branches of the natural sciences, economics has lagged behind
in the technical as well as the methodological aspects of scientific work.
ii) Economics is characterized by a paradigmatically motivated concentration on sta-
tionary equilibria, to the point that other dynamical phenomena than the stability
of these equilibria are ignored though they are at least known to exist in the formal
mathematical literature.
In the following, both complexes will shortly be discussed separately though they are
actually immanently identical.

ad i)

West (1985) distinguishes five stages of scientific progress: 24

Stage 1: Verbal description of the subject and the immanent logic of the problem.
Stage 2: Formal identification of the problem and quantification of the mathe-
matical relations.
Stage 3: Consideration of the dynamical aspects of the mathematical model in
the form of linear dynamical systems.
Stage 4: Re-consideration of the basic scientific principles and testing whether
models in stage 3 can represent all mentally possible phenomena. Estab-
lishment of the need to include nonlinear aspects in dynamical models.
Stage 5: Development of complete nonlinear models, which are able to explain
the phenomena possible in general reflection on the subject raised in
stage 1.

It is relatively easy to assign distinguished economists to the different stages of scientific

progress according to this rough classification: the classical writers like Smith, Ricardo,
Malthus, etc. definitely dominate the first stage. Stage 2 is occupied by the neoclassical
economists like Marshall, Walras, Pareto and others, who also bridged the gap to the

24 Cf. West (1985), pp. 3-10.

26 Cbapter 1

third stage of scientific progress. The mathematically sophisticated literature on the

existence of equilibria and its stability in a general equilibrium framework, dominated
by the work of Arrow and Debreu, has to be ascribed to this stage.
Stage 4 in the above list already leads to the frontiers of recent research in eco-
nomics. The literature on evolutionary economics and recent theoretical attempts to
demonstrate the possible occurrence of drastic divergence in the behavior of nonlin-
ear models from linear ones, etc., raise questions concerning the general validity of the
standard linear and mainstream thought experiments.
A general nonlinear dynamical economic theory representing stage 5 is therefore
obviously not in sight. In fact, regarding this last stage, economics does not stand alone.
The future relevance of dynamical phenomena typical to nonlinear systems can probably
not be anticipated in each of the disciplines which usually are considered as being more
progressive in this respect. However, nonlinear phenomena seem to have already been
incorporated into other disciplines with more acceptance than in economics.
It may be argued that it is simply a matter of time until economics adopts those
new techniques which become more and more important in other disciplines because
economics has always reacted sluggishly to new formal developments. However, in
contrast to the situation at the end of the last century, economists usually do not lack
a profound mathematical background anymore. 25 While this excuse for investigating
mainly linear systems is thus not acceptable anymore, it may be worthwhile to elaborate
a little bit more on the second justification of the use of linear dynamical systems.

ad ii)

The concentration on linear dynamical systems in economics is usually justified (if at

all) with an excuse. The phenomenon under consideration is actually thought of as
being nonlinear just because no convincing argument can be delivered why complex
structures like economic systems should be characterized by highly stylized and simple
relations in the form of linear equations. However, as linear models can be analyzed
much easier than nonlinear ones (at least in low-dimensional cases), actual phenomena
are approximated by stylized linear structures. 26

25 In fact, in some mathematical disciplines like game tbeory, optimal control, or

fixed point problems, economists definitely belong to tbe pioneers in developing
tbe appropriate mathematical apparatus wbicb may be useful in otber disciplines
as well.
26 Usually, tbis simplification goes band in band witb tbe prospect of future researcb
on tbe topic wbicb sbould investigate tbe influence of nonlinearities. Compare also
Baumol (1987), p. 105, for a discussion of tbis procedure.
 1.2.2. The Dominance of Linear Dynamical Economics 27

This simplification can certainly be justified in many cases, especially when the
true dynamical structure does not diverge essentially from the assumed linear form. If,
e.g., the number of equilibria in a dynamical system is identical in linear and nonlinear
formulations, if the nonlinear functions diverge only minimally from linear forms, and
if the interplay of the different nonlinear functions does not imply phenomena which
are unobservable in linear systems, the usage of linear functions may indeed lead to a
(qualitatively) sufficiently good approximation of the system's true behavior. However,
in higher-dimensional systems it will become increasingly difficult to discriminate be-
tween good and bad approximations. Indeed, it may become impossible to evaluate the
effects of neglecting a special (maybe numerically small) nonlinear term which perhaps
can drastically change the dynamical behavior of the system.
It may be that economists are not aware of the potential qualitative differences be-
tween linear and nonlinear dynamical systems. One major reason for the concentration
on linear systems may, however, have its origin in paradigmatic ideals of the functioning
of an economy. If one is (explicitly or implicitly) guided by the classical mechanistic
weltanschauung outlined in Section 1.1, then there is indeed no need to consider any-
thing other than linear systems. The fact that linear dynamical systems behave in a
very regular fashion and that the most complex dynamical behavior, namely steady
regular oscillations, can be modelled only by assuming a numerically exact parameter
constellation support the basic idea that an economy's equilibrium is asymptotically
stable. In addition, the dynamic behavior is predictable. A model which demonstrates
the impossibility of predictions must definitely be considered to be part of a negative
theory, especially because economics as a scientific discipline looks for a justification of
its mere existence by means of its postulated aim of possibly predicting future events.
Consequently, as can be expected, the different scientific economic schools have
developed a different attitude toward nonlinearities in economic models. Linear models
have been employed especially by neoclassical and "new" classical writers who, after
the (neo-) Keynesian disequilibrium interlude, have concentrated on the investigation of
equilibrium economics once again. Usually, the assumption of linear dynamical models
is explicitly justified by technical reasons: 27

The predominant technical requirement of econometric work which imposes rational

expectations is the ability to write down analytical expressions giving agent's decision
rules as functions of the parameters of their objective functions and as functions of the
parameters governing the exogenous random process they face. Dynamic stochastic
maximum problems with quadratic objectives, which produce linear decision rules,
do meet this essential requirement . . . Computer technology in the foreseeable future
seems to require working with such a class of functions, and the class of linear decision
rules has just seemed most convenient for most purposes. . . . It is an open question

27 Lucas/Sargent (1978), p. 314.

28 Chapter 1

whether for explaining the central features of the business cycle there will be a big
reward to fitting nonlinear models.

This opinion will probably not be shared by every Rational Expectations theorist but
it implicitly uncovers the ignorance of the importance of nonlinear phenomena. In
fact, former schools in equilibrium economics were not all characterized by this limited
methodological point of view. The mathematical literature on dynamical economics
published in the postwar era, which focussed on a general equilibrium framework, had, of
course, also dealt with nonlinear systems. However, the focus of research did not consist
of investigations into the effects of different kinds of possibly involved nonlinearities. On
the contrary, nearly all contributions concentrated on the question which assumptions
are necessary to ensure the stability of a general equilibrium. This literature therefore
excluded all those effects of nonlinearities which constitute an essential deviation from
the qualitative behavior of linear systems. Or, in other words, only those nonlinearites
were considered whose implied behavior is sufficiently close to that of linear systems.
Concentration on linear dynamical structures implies a problem which becomes ev-
ident in attempts to describe and explain actual time series. These series are obviously
not characterized by the regular kind of behavior which is typical in deterministic lin-
ear systems; instead, several irregularities in the form of, e.g., different types of noise,
different frequencies in oscillating series, etc., seem to be involved. The so-called New
Classical Macroeconomics overcomes this problem by the simple trick of introducing
stochastic exogenous disturbances in basically linear dynamical structures. The im-
manent forces governing an economy are still believed to behave in a regular fashion,
expressed by the various converging processes to the equilibria. The observed irregular-
ity in actual economies' time series can then be explained by the influence of random
terms, which do not have any purely economic meaning. 28 In that case, economic sys-
tems are compared with ideal mechanical devices whose perfect functioning is disturbed
by the influence of undesirable exogenous forces.
It can be argued that assuming these linear structures with superimposed stochas-
tic influences is justified when actual time series do not suggest a falsification of this
hypothesis. However, as was impressively demonstrated by Blatt (1978, 1980, 1983),
statistical procedures may be misleading in discriminating between linear and nonlin-
ear structures. Suppose that a time series is generated by a linear dynamic model
with stochastic influences. It can be expected that a linear regression will fit the data
extremely well. On the contrary, suppose that a time series is generated by a determin-
istic nonlinear model. It is not immediately clear that a linear regression will reject the

28 The observation that the influence of additive random terms in linear business cycle
models indeed implies theoretically generated time series which closely resemble
actual series dates back to Frisch (1933), Slutzky (1937), and Kalecki (1954). Cf
also Gabiscb/Lorenz (1989), pp. 87ff.
 1.2.2. The Dominance of Linear Dynamical Economics 29

hypothesis of a linear structure with stochastic influences. Blatt (1983) performed the
following experiment: 29 consider the discrete-time, multiplier-accelerator model of Hicks
(1950) with ceiling and floor. 30 The model is nonlinear because the ceiling (the maximal
growth path) and the floor (the minimal growth path determined by autonomous invest-
ment) constitute upper and lower bounds to the endogenous fluctuations. It is crucial
to the nonlinear version of the Hicks model that the endogenous (linear) fluctuations
are exploding. Blatt assumed the following parameter specifications in the endogenous
part of the Hicks model, i.e., the second-order difference equation

Yi = Co + Io + (c + ,B)Yi-1 - .BYi-2 (1.2.23)

= 25.0 + (0.75 + 1.5)Yi-1- 1.5Yi-2,
with c as the marginal propensity to consume and ,8 as the accelerator. The values of
the parameters in (1.2.23) imply exploding oscillations. A time series generated by the
deterministic nonlinear model, i.e., equation (1.2.23) with upper and lower bounds, was
investigated by postulating the linear stochastic equation

Yi = A+ (c + ,B)Yi-1 + .BYi-2 + Ut. (1.2.24)

Surprisingly, this linear lagged model fits the data of the nonlinear model sufficiently
well. Standard statistics for the model are

Yi = 28.5 + (0.713 + 0.887)Yi-1- .887Yi-2 (1.2.25)

(R 2 = 0.92, DW = 2.17, H = 0.56)

with H as the alternative Durbin statistics. The estimated value of the accelerator ,8
is lower than 1, indicating that the economy is inherently stable though the underlying
dynamical system (1.2.23) is unstable. An inspection of the statistics does not leave
much room for rejecting the linear structure of the time series, even when the principles
of critical rationalism are kept in mind. It can be suspected that similar econometric
investigations of actual time series suggested the presence of linear stochastic structures
in a multitude of cases and that the presence of nonlinearities has probably been rejected
too many times.
Nonlinear approaches to dynamical economics have been investigated mainly by
economists who felt uncomfortable with the classical paradigm of equilibrium eco-
nomics. Most contributions to nonlinear dynamical economics in the postwar era are
therefore credited to authors usually assigned to post-Keynesianism, neo-Keynesianism,

29 Compare also Brock (1988b) for a discussion of Blatt's results.

3 ° Cf. Gabiscb/Lorenz (1989), pp. 49ff.
30 Chapter 1

neo-Ricardianism, etc., though these contributions not always make use of the math-
ematical advances in dynamical systems theory. However, it would be misleading to
attribute research in nonlinear economic dynamics exclusively to these schools. Nonlin-
earities have played a particular role in several fields dominated by neoclassical writers.
For example, oscillating control trajectories were known to exist in nonlinear optimal
control theory long before the profession became aware of the potential relevance of
nonlinearities in other fields. Most interestingly, recent work on the effects of nonlinear-
ities in the standard domain of mathematical economics, namely the general equilibrium
analysis, is becoming more and more important.
While it is impossible to anticipate the future relevance of nonlinear phenomena
in economics at the present stage, it is nevertheless satisfying to observe that work on
nonlinear economics is underway. Even if the final agreement concludes that the effects
of some nonlinearities constitute only a marginal curiosity in economics, this research
program will certainly be helpful in uncovering important properties of dynamical eco-
nomic systems.
Chapter 2
N onlinearities in Dynamical Economics

If the world is not linear (and there is no qualitative reason to assume the contrary),
it should be natural to model dynamical economic phenomena nonlinearily. However,
there will not always exist an advantage in such a modelling. It depends crucially on
the kind of nonlinearity in a model and sometimes on the subject of the investigation
whether techniques appropriate to nonlinear systems provide new insights into the dy-
namical behavior of an economic system. Nonlinearities may be so weak that linear
approximations do not constitute an essential error in answering qualitative questions
about the system, e.g., whether or not the system converges to an equilibrium state.
While this is certainly true for low-dimensional systems, the effects of nonlinearities
in higher-dimensional systems cannot always be anticipated with preciseness, imply-
ing that linear approximations should be treated with scepticism especially when the
nonlinearities obviously diverge from linear structures.
Unfortunately, the techniques for analyzing nonlinear dynamical systems are far
less developed than for linear models. In detail, it is usually not possible to solve a
dynamical system anymore, i.e., to calculate the time path of a variable once the ini-
tial value is determined. It should be noted, however, that linear dynamical systems
hold an advantage over nonlinear systems only when considering low-dimensional ex-
amples. Concerning the stability question of high-dimensional linear systems, only a
few sufficient conditions on the entries of the coefficient matrix exist which ensure the
32 Chapter 2

asymptotic stability of an equilibrium. What is left to an analysis of nonlinear systems

is the description of the qualitative behavior in the sense that it is occasionally possible
to determine under what conditions a dynamical system exhibits a closed limit cycle or
related dynamical phenomena. It is sometimes also possible to exclude the occurrence
of some phenomena typical in nonlinear dynamical systems. In these cases linear ap-
proximations can provide a sufficiently precise description of the dynamical properties
of a given nonlinear system.
This chapter deals mainly with the concept of closed orbits in a dynamical system.
Though it is severly restricted by its dimensional limitation, the Poincan~-Bendixson
theorem has become one of the most popular tools in analyzing two-dimensional dy-
namical systems. The power of this tool will be demonstrated through the presentation
of an economic example from standard business cycle theory. As the Poincare-Bendixson
theorem does not exclude the existence of multiple closed orbits, a separate section is
devoted to the question of the uniqueness of these cycles. Finally, an example of a so-
called conservative dynamical system is provided through a presentation of Goodwin's
model of the class struggle, which in terms of dynamical systems theory is an example
of a so-called predator-prey system.

2.1. Preliminary Concepts

In the rest of this chapter, only continuous-time dynamical systems will be discussed.
Consider the n-dimensional, ordinary differential equation system 1

(2.1.1)

or, in vector notation,

x= f(x), (2.1.2)
with Was an open subset of R n. A differential equation system like (2.1.1 ), respectively
(2.1.2), describes a vector field in Rn. Figures 2.l.a and 2.l.b depict two examples of
vector fields in R 2 . The flow ~ 1 (x) : Rn --+ Rn of system (2.1.2) describes the future
development of all x E W. A solution curve or trajectory is defined as ~ 1 (x(O)), i.e,
when a certain x(O) is given, ~ 1 (x(O)) provides the values of x at t ( cf. Figure 2.2).
Central in the discussion of nonlinear dynamical systems is the notion of an attrac-
tor. A compact set A C W is called an attractor if there is a neighborhood U of A

1 As will be obvious throughout this section, the dependence of the variables on t is

taken for granted and will be omitted for notational convenience.
 2.1. Preliminary Concepts 33

\ t I
\ I

--
/
/
. "--
ll\ "
I I \ \
I l \
~------------------------~xl ~------------------------1.._ xl

2.l.a 2.l.b
Vector Fields in R 2
Figure 2.1

2.2.a 2.2.b
A Solution Curve and the Flow of a Dynamical System
Figure 2.2

such that A is the limit set of initial values x(O) E U. A limit set 2 of a point x E W
is the set of all points f_ E W with the property that there exists a sequence t; -+ oo
such that .lim 1>t.(x) =f. An attractor is therefore a set to which trajectories starting
1---+0C> l

2 Note that this deflnition of a limit set is identical with the notion of an w-limit set,
which is frequently used in the literature. The a-limit set of x is the set of points
from which trajectories ending in x originate.
34 Chapter 2

at initial points in a neighborhood of the set will eventually converge. 3 The set of all
initial points which are attracted by A is called the basin of attraction. The shaded
areas in Figures 2.3.a and 2.3.b depict basins of attraction for the cases in which the
attractor is a single point (cf. 2.3.a) and in which the attractor is a closed curve (cf.
2.3.b). The basin of attraction is delimited by its basin boundary. The complement of
an attractor is called a repeller.
Consider an inital point that does not belong to an attractor, i.e., x(O) rf_ A, and
suppose that the trajectory starting at x(O) eventually approaches the attractor. The
part of the trajectory <l>t(x(O)) which is not yet on the at tractor is called the transient.
Transients may exhibit wild behavior in the initial phase of the convergence toward an
at tractor.

2.3.a 2.3.b
Basins of Attraction
Figure 2.3

The motion on transients and on at tractors can also be distinguished by introducing

the notion of wandering and non-wandering sets. 4 A point x(O) is non-wandering
under the flow <l>t(x) if for any neighborhood U(x(O)), there exists a t 0 ~ 0 such that
<l>t(U) n U -:j:. 0 for t ~ t 0 , i.e., a trajectory starting in an arbitrary neighborhood of
x(O) eventually returns to this neighborhood. The set of non-wandering points is called
the non-wandering set. The wandering set is the complement of the non-wandering set.
Examples of non-wandering sets are asymptotically stable fixed points and stable limit

3 Actually, an attractor must be distinguished from an attracting set. There exist

examples showing that the at tractor may be only a subset of an attracting set. For
a graphical example, cf. Eckmann/Ruelle (1985), p. 623.
4 Cf. Guckenheimer/Holmes (1983), p. 236.
 2.1. Preliminary Concepts 35

cycles (to be introduced below). Points on transients and on trajectories diverging from
repellers are examples of wandering sets.
In the following, three types of attractors are shortly described.

Fixed Point Attractors

For a long time, economics has concentrated on a special kind of at tractor, namely fixed
point (or equilibrium point) at tractors. A survey of some techniques to establish the
stability of equilibria in linear dynamical systems has been provided in Chapter 1. In
considering nonlinear systems, the local and global stability properties of an equilibrium
must be distinguished. 5 Let x* = (xi, . .. , x~) be an equilibrium point (or fixed point)
x
of (2.1.1) with = 0 = f(x*).

• The equilibrium is stable if for every c; > 0 there exists a 8 > 0 such that for all
lx(O)- x*l :S: 8 one has I<I> 1 (x(O))- x*l :S: E Vt.
• The equilibrium is asymptotically stable if it is stable and if there exists a 8 > 0
such that for lx(O) - x* I :S: 8 one has lim I<I> 1 (x(O) - x* I = 0.
t-+oo

• The equilibrium is globally asymptotically stable if it is stable and lim I<I> 1 (x(O) -
t-+oo
x*l = 0 for every x(O) in the domain of definition of (2.1.1).

The local dynamical behavior of (2.1.1) near the equilibrium can be examined by means
of a linear expansion of (2.1.1) at the equilibrium point. 6 The properties of the Jacobian

5 Tbe following list of stability concepts is not complete but, instead, mentions only
tbose notions wbicb will be used in tbe present book. For otber stability concepts
compare, e.g., Habn (1984), pp. 748/f. and Takayama (1974), p. 356.
6 Tbe Taylor expansion of a em function f : R --> R at a point x* is defined as

f(x) = f(x*) + _!_ df(x*) (x- x*) + _!_ d2 f(x*) (x- x*)2
1! dx 2! dx 2
1 d3 f(x*)( *) 3 1 dmf(x*)( *)m
+ 31• dX 3 X - X + •.. + -,
m.
dX m X - X •

In a linear Taylor expansion only tbe first two terms are considered and all re-
maining terms are dropped. Tbe linear Taylor expansion of a differential equation
system (2.1.1) (or (2.1.2)) yields

x= f(x*) + Jlx=x* (x- x*),

36 Chapter 2

matrix, defined as

aft aft aft

axl ax2 axn
af2 af2 af2
Jlx=x* = axl ax2 axn (2.1.3)

afn afn afn

axl ax2 axn
and its eigenvalues are analogous to those of the coefficient matrix A in linear dynamical
systems ( cf. (1.2.3) ). For example, if the real parts of the eigenvalues of (2.1.3) are
negative, then the equilibrium is locally asymptotically stable.
The distinction between local and global asymptotic stability is a necessity in study-
ing nonlinear dynamical systems. While local stability in a linear system also implies
global stability, nonlinear dynamical systems may be characterized by multiple equi-
libria which are alternatively locally asymptotically stable and unstable. A useful tool
in investigating the global stability of an equilibrium is the concept of the Lyapunov
function, which will occasionally be applied in different contexts throughout this book. 7

Theorem 2.1 (Lyapunov)

Let x* be an equilibrium of a differential equation system and let V : W --+ R
be a differentiable function defined on some neighborhood W ~ U C R n of x*
such that:
(i) V(x*) = 0 and V(x) > 0 if x =/= x*, and
(ii) V(x) ~ 0 in W- {x*}.
Then x* is stable. Moreover, if
(iii) V(x) < 0 in W- {x*},
then x* is asymptotically stable.

Note that the neighborhood W ~ U can be chosen arbitrarily large. Thus, an equi-
librium is globally asymptotically stable if the conditions (i) - (iii) are fulfilled for the
entire domain of definition of (2.1.2).

witb Jlx=x* as tbe Jacobian matrix of partial derivatives evaluated at x*. Wben
x* is an equilibrium value, f(x*) is, of course, equal to zero.
7 Cf. Hirscb/Smale (1974), pp. 192ff. and Guckenbeimer/Holmes (1983), pp. 4£.
Extensive treatments of tbe usage of Lyapunov functions can be found in Habn
(1967) and Lasalle/Lefscbetz (1961).
 2.1. Preliminary Concepts 37

The choice of the appropriate Lyaprmov function in economic applications is not

always obvious. Good candidates in different fields are welfare functions, the national
product, or arbitrary constructions which resemble the notion of potentials in physics. 8

~----------------------------------------~~ xl

A Limit Cycle
Figure 2.4

Cyclical Attractors

The present monograph focuses, however, not on the question of (global or local) stabil-
ity of an equilibrium but on dynamic phenomena other than the (maybe) complicated
convergence to an attractor which is a single point. Attractors which are central in the
following discussion are those whose images are closed orbits. A point x is said to be
in a closed orbit if there exists a t =f. 0 such that <Pt(x) = x. If a closed orbit is an
attractor it will be called a limit cycle in the following.

Definition 2.1
A closed orbit r is called a limit cycle if there is a tubular neighborhood U(r)
such that for all x E U(r), any flow <Pt(x) approaches the closed orbit, i.e.,
lim d( <Pt(x), r) = 0 with d as the distance between the trajectory and the
t-+oo
limit cycle.

8 Cf. Chapter 6 for the role of potentials in catastrophe theory.

38 Chapter 2

An example of a limit cycle in R 2 is depicted in Figure 2.4. Trajectories starting

at initial points in the closed orbit will stay on the cycle forever. Trajectories starting
at initial points in the neighborhood U(r) of the closed orbit will approach the cycle in
a spiralling fashion.

Saddle Loops

An example of an attractor which is neither a fixed point nor a closed orbit is depicted
in Figure 2.5. The associated dynamical system has two unstable fixed points (A and
C) and a saddle as a third fixed point (B). The two loops that appear when trajectories
leave the saddle on the unstable manifold and return to it on the stable manifold, are
called saddle loops or homo clinic orbits.

Saddle Loops
Figure 2.5

Saddle loops can occur in a variety of constellations of multiple fixed points and can
enclose closed orbits. 9

In higher-dimensional systems (n 2: 3) more complicated attractors are possible. Several

complicated attractors will be introduced in Chapter 4.

9 Cf. Guckenbeimer/Holmes (1983), p. 46.

 2.2.1. The Existence of Limit Cycles 39

2.2. The Poincare-Bendixson Theorem

In most economic applications, especially when dealing with nonlinear dynamical sys-
tems, it is desirable to establish results on the global behavior of dynamical systems.
Unfortunately, the global character of the results must be compensated by compromis-
ing in respect to the dimension of the dynamical system; this restriction arises because
it is possible to completely categorize the global behavior of a dynamical system only
in the two-dimensional case.
In R 2 , three different types of limit sets can be distinguished: 10
• Fixed point attractors.
• Limit Cycles.
• Saddle loops, i.e., fixed points and the trajectories connecting them.
The subject of the Poincare-Bendixson theorem is to provide sufficient conditions for
the existence of limit cycles in particular subareas of the plane. 11

2.2.1. The Existence of Limit Cycles

Consider the two-dimensional differential equation system

.:h = J(x1,x2)
(2.2.1)
x2 = g(x1,x2),

and assume that an initial point x(O) = ( x 1 (0), x 2 (0)) is located in a bounded region
D E R 2 • The set of points x E D is called an invariant set for (2.2.1) if for every
x(O) ED the trajectories ~ 1 (x(O)) stay in D for all t.
Suppose that such an invariant set exists for the system (2.2.1 ). When the set
contains limit sets, basically all three types of limit sets are possible. The Poincare-
Bendixson theorem discriminates between these different types:

Theorem 2.2 (Poincare- Bendixson)

A non-empty compact limit set of a C 1 dynamical system in R 2 , which contains
no equilibrium point, is a closed orbit.

1 ° Cf. Guckenheimer/Holmes (1983), p. 45.

11 A rigorous' textbook presentation of the Poincare-Bendixson theorem can be found
in Hirsch/Smale (1974), Chapter 11, to which the interested reader is strongly
referred. Further presentations can be found in Boyce/DiPrima (1977), Chapter
9, Coddington/Levinson (1955), Chapter 16, and Arrowsmith/Place (1982), pp.
109/f. A concise overview is Varian (1981).
40 Chapter 2

A Limit Cycle in a Compact Set D

Figure 2.6

Figure 2.6 depicts an example of an invariant set D in the plane. On the boundary of
D, the vector field points inwards the set, implying that a trajectory will stay in D for
all t once it has entered the set. If the fixed point in Figure 2.6 does not belong to the
limit set L(x) of the points in D (e.g., if it is an unstable equilibrium) then all initial
points in D must converge toward a closed curve fort---+ oo. As saddle loops imply the
existence of another fixed point (in the form of a saddle), the closed curve can only be
a closed orbit.
While the equilibrium has been excluded from the limit set in D, the presence of
a fixed point is a prerequisite for the existence of a closed orbit in a particular area of
the plane: 12

Theorem 2.3
A closed trajectory of a continuously differentiable dynamical system in R 2
must necessarily enclose an equilibrium point with xl = x2 = 0.

Summarizing, the following procedure is necessary in applying the Poincan~-Bendixson

theorem to a specific dynamical system in R 2 .
• Locate an equilibrium point of the dynamical system and examine its stability
poperties.
• If the equilibrium is unstable, search for an invariant set D enclosing the equilib-
rium. When a closed orbit does not coincide with the boundary of D, the vector
field f and g must point into the interior of D.

12 Cf. Boyce/DiPrima (1977), p. 445, and Hirsch/Smale (1974), p.252.

 2.2.1. The Existence of Limit Cycles 41

The search for the set D constitutes the essential difficulty in applying the Poincare-
Bendixson theorem to a dynamical system. On the other hand, it is relatively easy
to exclude the existence of closed orbits in a system like (2.2.1). Let S be a simply
connected domain in W. 13

Theorem 2.4 (Bendixson) 14

Assume the functions f and g in (2.2.1) having continuous first order deriva-
tives inS. If the sum (of fox 1 +ogfox 2 ) has the same sign throughout S, then
there is no periodic solution of (2.1.3) lying entirely inS.

The Poincare-Bendixson theorem provides sufficient conditions for the existence of

closed orbits in a set D but it does not say anything about the number of these or-
bits. In fact, it is possible that more than a single closed orbit exists. 15 When several
cycles exist, it is obviously impossible that all cycles are attracting, i.e., that they are
limit cycles in the sense of Definition 2.1. Provided that the stationary equilibrium is
unstable, the innermost cycle in D is stable. Additional cycles are then alternatively
stable and unstable.
The most serious disadvantage of the Poincare-Bendixson theorem and the related
theorems is the fact that they are restricted to two dimensions. Analogous theorems in
higher dimensions do not exist. This is not due to a lack of mathematical research, but to
a conceptual problem. While in the two-dimensional case the plane can be divided into
an inner and outer region of the set D with the above mentioned implications, things get
drastically more difficult in the three-dimensional case. Suppose that a closed set D C
R 3 exists with the vector field pointing inwards to D and that the unique equilibrium is
unstable. Nevertheless, it is possible that no closed orbits exist because a trajectory can
arbitrarily wander in R 3 without intersecting itself and without necessarily approaching
a limit set (cf. Figure 2.7).
Despite the fact that this limitation usually restricts the application of the theorem
to highly aggregated model-economies, it provides the theorist with a powerful tool
in facing complicated two-dimensional dynamical systems which sometimes cannot be
described by means of graphical phase diagrams alone.

13 A "simply connected" set is a set that consists of one piece and does not contain any
holes in it. For example, the basin of attraction in Figure 2.3.a is simply connected
while the basin in Figure 2.3.b is connected but not simply connected (cf. Debreu
(1959), p. 15 and Arrowsmith/Place (1982), p. 111.
14 Cf. Andronov/Chaikin (1949), p. 227 and Boyce/DiPrima (1977), p. 446.
15 Cf. Section 2.3 for sufficient conditions for the uniqueness of limit cycles.
42 Chapter 2

The Invalidity of the Poincare-Bendixson Theorem in R 3

Figure 2.7

2.2.2. The Kaldor Model as a Prototype Model in Nonlinear Dynamical

Economics

As early as in 1940 Kaldor presented a business cycle model which is able to endoge-
nously generate limit cycles, and which in the sequel has served as the prototype model
for nonlinear dynamical systems in economics. 16 Actually, Kaldor's contribution should
be considered in conjunction with the work of Kalecki (1937, 1939), who investigated
similar models but concentrated on different aspect of stability.
The key to Kaldor's model can be found in his assumptions on investment behavior
in a one-sector model. Investment depends positively on income, but the propensity to
invest decreases if income diverges from its stationary equilibrium level. Furthermore,
at a given level of income, investment decreases if the capital stock increases 17 , i.e.,
I= I(Y, K); Iy > 0, IK < 0 and there exists a Y1 such that Iyy > 0 ( < 0) if Y < Y1
(Y > Y1 ), with Y as income, K as the capital stock, I as gross investment, and the
subscripts denoting the partial derivatives with respect to the nth argument ( cf. Figure
2.8).
For simplicity, assume that savings depends on income in the usual way 18 , i.e.,

16 A more intensive discussion of the Kaldor model and its formal reconsideration by
Chang/Smyth (1971) can be found in Gabisch/Lorenz (1989), pp. 122ff.
17 Cf. Gabisch/Lorenz (1989), pp. 122-129 for economic justifications of these as-
sumptions.
18 Kaldor himself assumed a sigmoid shape of S(Y, ·). The linearity assumption does
 2.2.2. The Kaldor Model 43

Kaldor's Investment Function

Figure 2.8

0 < Sy < 1, and, additionally, on the capital stock with SK > 0. 19 Income changes
proportionally to the excess demand on the goods market. Summarizing, the Kaldor
model can be written as
Y = a(I(Y, K)- S(Y, K))
(2.2.2)
k = I(Y, K) - hK,
with b as the constant depreciation rate.
Consider first the local stability of the equilibrium of system (2.2.2), i.e., the point
(Y*, K*) for which Y = k = 0. A linear Taylor expansion of (2.2.2), evaluated at the
equilibrium (Y*,K*), yields the Jacobian matrix

J = (a([y- Sy)
(2.2.3)
!y

with the determinant

(2.2.4)

and the trace

tr J = a(Iy- Sy) + (h- b). (2.2.5)

not change the qualitative results presented below.

19 This assumption is not very convincing. Chang/Smyth (1971) therefore assumed
that SK < 0, i.e., a standard wealth effect prevails. However, the different signs do
not essentially effect the results.
44 Chapter 2

It follows from the consideration of linear continuous-time systems in Section 1.2.1. that
the eigenvalues are
>. 1 2 = trJ ± .j(trJ) 2 - 4 detJ. (2.2.6)
' 2
The determinant must be positive in order to exclude the possibility of a saddle point.
The equilibrium is then asymptotically stable if the real parts of the eigenvalues, i.e.,
the trace of the Jacobian, are negative. Inspection of (2.2.5) shows that this is the
case if a(ly - Sy) < -(IK - c5). As the right hand side of the inequality is positive,
the difference between the marginal propensity to invest and to save must therefore be
smaller than a positive value.
°
Kaldor explicitly assumed that (ly- Sy) > 0 at the stationary equilibrium. 2 Fig-
ure 2.9 demonstrates the model (2.2.2) for this constellation of the slopes at equilibrium.

y
yl y• y2
.Multiple Goods Market Equilibria in the Kaldor Model
Figure 2.9

When the trace is positive, i.e., a(ly - Sy) + (IK - c5) > 0, the equilibrium is
not asymptotically stable. The first requirement of the Poincare-Bendixson theorem is
therefore fulfilled.
Second, it should be examined whether the Bendixson criterion, i.e., Theorem 2.4,
is fulfilled. As the slope [y decreases for Y diverging from the stationary equilibrium,
the term ([y- Sy) changes its sign twice at appropriate income levels. Thus, depending
on the magnitude of (IK - c5), it is possible though not necessary that the trace of the
Jacobian changes its sign, too. The Bendixson criterion therefore does not exclude the
existence of closed orbits.

20 In fact, Kaldor intended to express the instability of the stationary equilibrium by

this assumption.
 2.2.2. The Kaldor Model 45

The question of whether a compact invariant set D exists such that the vector
field (2.2.2) points inwards toward that set can be answered by means of a graphical
argument. Figure 2.10 represents the phase portrait of the Kaldor model.

y
yl
The Phase Portrait of the Kaldor Model
Figure 2.10

Consider first the set of points (Y, K) with the property that the capital stock does
not change, i.e.,
K = 0 = I(Y,K)- 8I<. (2.2.7)

Total differentiation yields

dK ly
- = - - - >0. (2.2.8)
dY ik=o lK- 8

Thus, the locus of all points in the set {(Y, K) jK = 0} is an upward sloping curve.
For all K above the curve k = 0, investment decreases because of (IK- 8) < 0, hence
k < 0. In the same way, k is positive for all K below the curve for k = 0.
The set of points (Y, K) withY= 0 is given by

Y = 0 = I(Y,K)- S(Y,K). (2.2.9)

It follows that
dK = Sy - ly ~ O. (2.2.10)
dYrY=o IK-SK<
The sign of (2.2.10) depends on the values of Sy and [y. The difference Sy- [y is
positive for low as well as for high levels of income and is negative for normal levels
46 Chapter 2

in the neighborhood of the stationary equilibrium. It follows that the curve for Y = 0
is negatively sloped for low and for high values of Y and is positively sloped in a
neighborhood of Y*. Income increases (decreases) for all Y below (above) of the curve
Y=O.
As can be seen in Figure 2.10, it is easy to find a set D with the desired properties
in the Kaldor modet2 1 Note, however, that the set D has to have the form of a polygon
and that the boundary of D must not coincide with the K-axis. T~e subset D C R 2
in Figure 2.10 is compact, and the vector field obviously points inwards the set on the
boundary. Thus, the requirements of the Poincare-Bendixson theorem are fulfilled and
it has been shown that the Kaldor model exhibits limit cycles.

2.3. The Uniqueness of Limit Cycles

As was mentioned in Section 2.2., the Poincare-Bendixson theorem does not exclude
the possibility of multiple closed orbits which are alternatively stable and unstable.
However, the question of how many cycles exist in a dynamical system is extraordinarily
important, because in case of multiple cycles the initial conditions determine the final
motion of a system with a specific amplitude. It is important to know, especially in
business cycle models, whether by choice of the initial conditions the amplitude of the
cyclical motion can be decreased or not.

() '\

I
I

I
I
I
I

X 1

Multiple Limit Cycles

Figure 2.11

21 In other examples the search for this set D can be difficult. Cf. Gabisch/Lorenz
(1989), pp. 143/f. for a discussion of a non-Walrasian business cycle model by
Benassy (1984) with a complicated compact set D. Cf. also Mas-Colell (1986).
 2.3.1. The Lienard Equation 47

Unfortuantely, this question of how many cycles exist cannot be answered for most
dynamical systems. One of the few nonlinear systems for which it is indeed possi-
ble to establish sufficient conditions for the existence of unique cycles is the so-called
generalized Lienard equation.

2.3.1. The Lienard Equation

Consider the two-dimensional differential equation system22

x=y-f(x)
(2.3.1)
y = -g(x)

or, written as a second-order differential equation,

x + f'(x)x + g(x) = 0. (2.3.2)

This so-called Lienard equation was originally formulated to express the dynamics of
a spring mass system with g(x) as the spring force and f'(x)x as a damping factor.
Setting g(x) = x and f(x) = (x 3 /3- x) in (2.3.2) yields the so-called van der Pol
equation
X + (x 2 - 1 )x + X = 0, (2.3.3)

which can be considered a prototype equation in two-dimensional nonlinear systems.

Levinson/Smith (1942) proved the following theorem for equation (2.3.2). 23

Theorem 2.5 (Levinson/Smith)

Equation (2.3.2) has a unique periodic solution if the following conditions are
satisfied.

i) f' and g are C 1 .

ii) 3 Xt > 0 and x2 > 0 such that for -x 1 < x < x2 : f'(x) < 0, and > 0
otherwise.
iii) xg(x) > OVx-::/= 0
iv) lim F(x) lim G(x) = oo where F(x) = fox f'(s)ds and G(x)
J; g(s)ds.
X-+00 X-+00

22 Cf. Hirsch/Smale (1974), p.215 and Boyce/DiPrima (1977), pp.447 ff.

23 Cf. Levinson/Smith (1942), p.397 f.
48 Chapter 2

Condition v) is fulfilled if f'(x) is even and g(x) is odd. 24

The theorem allows to establish the uniqueness of limit cycles in a convenient way.
The symmetry assumption v) represents the only more or less severe specification in a
two-dimensional system. 25
The Levinson/Smith theorem is not the only tool for establishing the uniqueness
of limit cycles. Averaging methods allow for quantitative approximations of limit cycles
in many cases 26 , implying that the number of cycles and their stability can directly be
examined.

2.3.2. Unique Cycles in a Modified Phillips Model

The Lienard-van der Pol equation has received relatively little attention in dynamical
economics, probably because of the restrictive symmetry assumptions or because of the
properties which are necessary in applying the Levinson/Smith theorem. A remarkable
exception can be found in Ichimura (1955) with an examination of some traditional
mathematical business cycle models. 27
In the following, a simple modification of a well-known business cycle model, namely
Phillips' (1954) continuous-time, multiplier-accelerator model, will be presented that
uncovers the sufficient variations needed for fulfilling the requirements of a Lienard
equation. 28
Consumption, C, depends on income in the usual way:

C(t) = cY(t), 0 < c::; 1, (2.3.4)

with Y as net income. The desired capital stock, Kd, depends linearily on income:

Kd(t) = vY(t), v > 0. (2.3.5)

24 A function is even iff( x) = f( -x ), e.g. a parabolic function with the origin as the
center. A function is odd if -g(x) = g( -x), e.g., a cubic equation.
25 For example, it can easily be shown that the van der Pol equation (2.3.3) fulfills
the requirements of the Levinson/Smith theorem.
26 Cf. Guckenheimer/Holmes (1983), pp. 166/f. Chiarella (1986) discusses several
endogenous business cycle models with the help of averaging methods.
27 An inspection of the Lienard conditions in the Kaldor model, outlined in Section
2.2.2., can be found in Gabiscb/Lorenz (1989), pp. 158/f. Compare also Scbinasi
(1981).
28 Cf. Lorenz (1988a) for the following model.
 2.3.2. Unique Cycles in a Modified Phillips Model 49

It is assumed that the firm changes the capital stock as soon as the actual stock differs
from the desired one:

i< = I(t) = f3(Kd(t)- K(t)) = f3(vY(t)- K(t)), {3 > 0, (2.3.6)

with I as net investment. The coefficient {3 is an adjustment parameter and expresses

the reaction speed of investment in response to a discrepancy between actual and desired
stock.
Assume that income changes according to the excess demand, C(t) + I(t)- Y(t),
in the goods market:

dY(t) ·
-;It= Y(t) = a(C(t) + I(t)- Y(t)), a> 0, (2.3.7)

with the coefficient a as an adjustment parameter.

Differentiating (2.3.6) with respect to time,

di(t) . .
----;It= I(t) = f3(vY(t)- I(t)), (2.3.8)

and substituting for j and I in the differentiated form of (2.3.7) yields the linear second-
order differential equation with constant coefficients

Y(t) + (a(1- c)+ {3- af3v)Y(t) + a{3(1- c)Y(t) = 0. (2.3.9)

Let y = Y- Y*, withY* as the equilibrium level of net income. Equation (2.3.9) then
turns into
jj(t) + (a(1- c)+ {3- af3v)y(t) + a{3(1- c)y(t) = 0. (2.3.10)

The solution of such a second-order differential equation with constant coefficients has
been introduced in Section 1.2.1.; the eigenvalues of (2.3.10) are

(2.3.11)

with A 1 = (a(1- c)+ {3- af3v) and A2 = a{3(1- c). The eigenvalues are complex
conjugate when the discriminant is negative. Equation (2.3.9) then exhibits persistent
oscillations when A 1 = 0, i.e., when the eigenvalues are purely imaginary.
In order to transform (2.3.10) into a Lienard equation the assumption of constant
coefficients has to be abandoned. Formally, a Li{mard equation can easily be obtained.
For example, let {3 = h(y) be a smooth function depending on income in the way
illustrated in Figure 2.12, i.e., investment responds non-linearily to gaps between the
50 Chapter 2

desired and the actual capital stock. While a strong reaction to these gaps is assumed
for income levels near the equilibrium, investment responds sluggishly if the deviation
of income from its equilibrium level is large. The investment function (2.3.6) therefore
turns into a kind of Kaldorian investment function with the well-known sigmoid form
of l(y, ·),and, additionally, with IK < 0 depending on the income level.

h(y)

--------------------~0--------------------~ y

The Investment Coefficient j3 = h(y)

Figure 2.12

With (3 = h(y ), equation (2.3.10) becomes

jj + (o:(1- c)+ h(y)- o:h(y)v)y + o:h(y)(1- c)y = 0. (2.3.12)

Set f' = (o:(1- c)+ h(y)- o:h(y)v) and g(y) = o:h(y)(1- c)y. Under the assumptions

• f' and g are C 1 '

• (3 = h(y), h(y) > OVy, h'(O) = 0, h"(O) < 0,
• h(y) = h( -y),
• o:v > 1,
• h(O) -o:(1 - c)
> 1- o:v '
equation (2.3.12) is indeed a Lienard equation which fulfills the assumptions of the
Levinson/Smith theorem:

i) Assumed
ii) There exist Yl < 0 and Y2 > 0 such that f' = ( o:(1 - c) + h(y) - o:h(y )v) < 0 for
Y1 < Y < Y2 and f' > 0 otherwise.
iii) As g(y) = o:h(y)(1- c)y > (<) 0 for y > (<) 0, it follows that g(y)y > 0 Vy.
 2.4.1. Center Dynamics in Conservative Dynamical Systems 51

iv) lim F(y) = J: f'(s)ds = oo because f'(y) increases for y > y2 , and lim G(y) =
J: g( s )ds = oo because h(y) > 0 V y.
y-+oo y-+oo

v) f'(y) = f'( -y) by assumption, and g(y) = -g( -y) because ah(y)(1- c)y > (<) 0
for y > {<) 0.
Though equation {2.3.12) is therefore formally identical with a Lienard equation and
fulfills the requirements of the Levinson/Smith theorem, it must be stressed that the
postulated function /3 = h(y) is purely ad hoc. While the general assumption that h(y) is
bell-shaped can already be criticised, it is further necessary to assume the above relations
between h(y) and the remaining coefficients in order to obtain the desired result. The
usual advantage of nonlinear cycle models as compared with linear models like the
original Phillips model, namely that these models do not rely on precise parameter
constellations in order to generate persistent fluctuations, is therefore weakened as far
as the uniqueness of cycles is concerned, at least in the special example presented above.

2.4. Predator-Prey Models

The dynamical models presented thus far are able to exhibit limit cycles. If a system
has a single limit cycle, then the trajectories starting at arbitrary initial points in the
basin of attraction are attracted by this cycle. In addition to these limit cycle systems
there exists another type of a dynamical system which is able to generate oscillations
but which is characterized by a different dynamical behavior.

2.4.1. Center Dynamics in Conservative Dynamical Systems

Consider a system of two ordinary, one-dimensional differential equations

x=ft(x,y)
{2.4.1)
y = h(x,y)
with the Jacobian matrix

)
8ft 8ft
J~ (
ax
8!2
8y
8!2
{2.4.2)

ax 8y
Assume that the determinant of J is positive for all (x, y). It was shown in Section 1.2.1
and in the models presented thus far that the sign of the trace of the Jacobian then
52 Chapter 2

plays a dominant role in determining the kind of oscillating behavior of a dynamical

system. The question therefore arises whether a qualitative description of the meaning
of the trace of J can be provided. In fact, in some physical applications of systems like
(2.4.1) it is possible to assign the existence of dampening or friction to the negative
value of the trace. 29 The following heuristic reflection may be helpful in understanding
dynamical systems which exhibit closed orbits.
Consider a dynamical model like the Kaldor model to which the Poincare-Bendix-
son theorem can be applied. The equilibrium has to be unstable, i.e., the trace of the
Jacobian has to be positive. In other words, there exists a tendency away from the
equilibrium in all directions, which may be interpreted as a negative friction. If this
were the case for every point in the phase space, the flow of the system would spiral
toward the outer bounds of the phase space and no closed orbit could exist. However, as
was demonstrated in the Kaldor model, the trace of the Jacobian must change its sign
if limit cycles are to be generated. A negative trace corresponds to a positive friction
such that the formerly exploding behavior will be damped for points sufficiently far
away from the equilibrium. A closed orbit therefore emerges where the exploding and
imploding forces both tend toward zero, i.e., where the trace vanishes.
Dynamical systems with this kind of behavior are called dissipative systems. 30 As
will be seen in the course of this book, this class of systems constitutes the majority of
dynamical systems in economics. However, there exists another class of systems which
has received interest especially in classical mechanics, namely the so-called conservative
dynamical systems. In a conservative system there is neither an additional input nor a
loss of energy, implying that no friction can exist. According to the preceding heuristic
reflection on the qualitative meaning of the trace of a Jacobian, this absence of friction
is equivalent to a vanishing trace for all points in the phase space. 31
One such conservative dynamical system which can be of economic interest is the
predator-prey system investigated by Lotka (1925) and Volterra (1931) in an early at-
tempt to understand biological and ecological phenomena by means of mathematical
analysis. The model is concerned with the dynamical relations between two interdepen-
dent species which can be described as predators and preys within an ecosystem. 32 The

29 Cf., e.g., the original Lienard equation in Section 2.3., where f'(x)x represents a
damping term.
30 The term stems from considerations of physical systems with a permanent input of
energy which dissipates through the system. If the energy input is interupted, the
system collapses to its equilibrium state.
31 The obvious physical example of a conservative dynamical system is, of course, the
perfect pendulum where no friction is involved. Note that the harmonic oscillator,
shortly mentioned in Section 1.2.1., is an example of a conservative system.
32 Cf. Clark (1976) for a survey of economic approaches to biological phenomena.
 2.4.1. Center Dynamics in Conservative Dynamical Systems 53

dynamical system consists of the two-dimensional differential equation system

x =ax- bxy
a, b,c,d > 0, (2.4.3)
iJ = -cy + dxy

with x as the total prey population and y as the predator population. The prey are
the only food source available to the predator. Thus, if x = 0 the predator popula-
tion decreases exponentially at the rate c. If y = 0, then the prey population grows
exponentially to infinity at the rate a.
System (2.4.3) has two equilibria with x = iJ = 0, namely ( x*, y*) = (c/ d, afb) and
the trivial equilibrium (0, 0) (a saddle point). The Jacobian matrix of (2.4.3), evaluated
at the non-trivial equilibrium, is

)
a- by -bx 0 -bcfd
J= ( ) = ( (2.4.4)
dy -c+dx dafb 0

and has det J = ac > 0 and tr J = 0, i.e., the eigenvalues are purely imaginary. The
equilibrium is therefore neutrally stable, implying that no conclusion can be drawn on
the global behavior of (2.4.3) from the inspection of the Jacobian (2.4.4).
In order to study the global dynamic behavior of a system like (2.4.3), it is useful
to introduce the concept of the first integral: 33

Definition 2.2

A continuously differentiable function F: R 2 -+ R is said to be a first integral

of a system i = f(x), x E R 2 , ifF is constant for any solution x(t) of the
system.

When such a first integral exists it is not unique, i.e., when F(x) is a first integral then
F( x) + C is a first integral as well. If a dynamical system possesses a first integral then
any initial point (except the equilibria) is located in a closed orbit.
In order to examine whether (2.4.3) possesses a first integral 34 , eliminate time from
the system by dividing both equations, i.e.,

dy (c- dx)y
-=- (2.4.5)
dx (a- by)x ·

33 Cf. Andronon/Chaikin (1949), pp. 99ff. and Arrowsmith/Place (1982), pp. 101pp.
and 144pp. for the following ideas.
34 Cf. Gandolfo (1983), pp. 450ff.
54 Chapter 2

Rearranging, dividing by xy, and integrating yields

-a ln y + by - cln x + dx = A (2.4.6)

where A is a constant. Equation (2.4.6) can be written as

(2.4. 7)

Set y-aebyx-cedx = F(x, y). The function F(x, y) is a first integral of (2.4.3), which
can be seen from differentiating it with respect to time:

.!!_F( ) _ aF(x, y). aF(x, y).

dt x, y - ax X+ ay y (2.4.8)

The partial derivatives ofF are

aF(x, y) = F(x, y)( -~+d) (2.4.9)

ax X

and
aF1x, y) = F(x, y)( -~+b), (2.4.10)
y y
respectively, such that

d c a
-d F(x,y)
t
= F(x,y)(--X + d)(a- by)x + F(x,y)(-- + b)(-c+ dx)y
y (2.4.11)
= 0.

The function F( x, y) is therefore a first integral.

The following theorem summarizes the discussion of the dynamical behavior of
(2.4.3):

Theorem 2.6 ( Hirsch/Smale) 35

Every trajectory of the Lotka/Volterra equations (2.4.3) is a closed orbit (ex-
cept the equilibrium (y*, x*) and the coordinate axes).

It follows that the closed orbits cannot be limit cycles. Otherwise, the trajectories which
approach a limit cycle are not closed orbits. As each point in the phase space is located
in a closed orbit, the initial values of x and y at t = 0 therefore determine which of the

35 Cf. Hirscb/Smale (1974), p. 262.

 2.4.1. Center Dynamics in Conservative Dynamical Systems 55

a/b
-0
X

Closed Orbits in a Predator-Prey System

Figure 2.13

infinitely many closed orbits describes the actual dynamical behavior of the system ( cf.
Figure 2.13).
The predator-prey system (2.4.3) was classified as a conservative system with the
help of the first integral. An alternative definition of conservative dynamical systems
concentrates on the evolution of initial points contained in a subset of the phase space.
Assume that a dynamical system has infinitely many closed orbits and that every initial
point is located in such a closed orbit. Consider the area A in Figure 2.14. Initial points
contained in this subset of the plane move to the area B under the action of the flow. If
the area A is identical with the area B, the dynamical system is called area preserving
(or volume preserving when the system is higher-dimensional ( n 2: 3) ). A dynamical
system is called conservative if it is area preserving.
In contrast, dissipative systems contract areas (or volumes) when trajectories ap-
proach an attractor. Figure 2.15 shows two trajectories starting at different initial
points and approaching a fixed point attractor. The area between the two trajectories
is continuously getting smaller and approaches zero when the trajectories are close to
the equilibrium.
Formally, the property of area preservation of a system :X = f( x ), x E R n, can be
examined with the help of the Lie derivative or the divergence defined as

vv =div r =I:. ax;

a!;, i = 1, ... ,n,
I

with V as the "volume" (i.e., the n-dimensional analogue of an area) and div f as the
56 Chapter 2

xz

Area Preservation in a Conservative System

Figure 2.14

divergence of f. 36 The Lie derivative is negative when the system is dissipative, i.e., if
it contracts area, and it vanishes when the system is conservative.

xz

Area Contraction in a Dissipative System

Figure 2.15

In most examples from classical mechanics the two alternative definitions of conser-
vative and dissipative systems, i.e., via the existence of a first integral or the area preser-
vation property, lead to identical classifications. 37 The predator-prey system (2.4.3) is

36 When the dynamical system is linear (or linearized) the Lie derivative is thus iden-
tical with the trace of the Jacobian matrix.
37 Cf. Arnold (1973), pp. 198f. and Arrowsmith/Place (1982), pp.103f. for identical
 2.4.2. The Goodwin Model 57

a peculiar system because it has a first integral but the Lie derivative differs from zero:

v= a-
- by - c + dx =/:. 0
v
for all (x, y) except the equilibrium. When x andy change during the motion in a closed
orbit, the sign of the Lie derivative changes. An answer to this puzzle can heuristically
be delivered by inspecting the area covered by two closed orbits in Figure 2.13: in
the region where the orbits come close to each other the derivative is positive. Areas
between the orbits are extended and imply the larger distance between the orbits in
other regions. A negative Lie derivative in those regions implies the contraction toward
the initial region with a short distance between the orbits.

2.4.2. Goodwin's Predator-Prey Model of the Class Struggle

Conservative dynamical systems are really rare in economics. A remarkable exception is

Goodwin's 1967-model of the class struggle which leads to the same formal framework
as the predator-prey model of Lotka and Volterra and which will be presented in the
following.
Consider an economy consisting of workers and capitalists. Workers spend all their
income on consumption, while capitalists save all their income. The following list of
abbreviations, definitions, and relations describes the framework of the economy. For
convenience, the goods price is normalized to unity.

Output: y
Labor: L
Capital: J{
Wage rate: w
Goods price: p=1
Labor productivity: Y / L = a = a 0 e<l>t, <P = constant
Labor income: wL
Labor income share: u = wLjY = wja
Capital income: Y-wL
Profit share: 1- wja
Savings: (1- wja)Y
Capital output ratio: I</Y = f7, f7 =constant
Labor supply: N = N 0 ent, n = constant
Employment rate: v = L/N

results in Hamiltonian systems.

58 Chapter 2

If investment I= K equals savings, the growth rate of the capital stock, K / K, is given
as K/K = (1- w/a)Y/K = (1- wja)/u. The growth rate K/K equals the growth
rate of income, Y /Y, when the capital-output ratio is constant. With an exogenously
determined labor productivity, a, employment L is given by L = Y /a. Logarithmic
differentiation of this equation yields

L/L = Y/Y- ¢>

(2.4.12)
= (1- wja)fu- ¢>.

The above presentation can be summarized in the following set of growth rates involved
in the model:

N
n
N
a
= ¢>
a
k w y w
(1- -)--; = (1- -)/u
K a R a
y k
-
y K
L w y
(1- -)/u- ¢> = - - ¢>
L a y

The central variables in the Goodwin model are the employment rate v and the la-
bor bill share u. Consider first the evolution of the employment rate v: logarithmic
differentiation and substitution yields

v/v=L/L-N/N
= Y /Y- ¢>- n
= (1- wja)ju- (¢> + n) (2.4.13)
1-u
=--(¢>+n)
0'

or
1-u
v= ( - - (¢>
0'
+ n))v, (2.4.14)

which is a differential equation in the two variables v and u. The labor bill share u
develops according to
uju = wjw- a/a= wjw- ¢>. (2.4.15)
 2.4.2. The Goodwin Model 59

Goodwin assumed that the wage rate changes according to a standard Phillips curve,
1.e.,
8!
w/w = f(v), lim f(v)
v~l
= oo, lim f(v)
v-..o
= w < 0, av > o. (2.4.16)

For simplicity, (2.4.16) is linearily approximated by wjw = -1 + pv, yielding

u/u = _, + pv- ¢>, (2.4.17)

or
(2.4.18)

Equations (2.4.14) and (2.4.18) have the same formal structure as the Lotka/Volterra
equations (2.4.3):
v = (1/a- (¢> + n)- u/a)v (2.4.19)
u=(-(¢>+!)+pv)u.
The employment rate v serves as the prey while the wage bill share acts as the predator.
When there is no employment, the wage bill tends to zero. When the wage bill tends to
zero, the employment rate increases since no relevant labor costs occur. As the equations
(2.4.19) are formally identical with the Lotka-Volterra equations (2.4.3), every initial
point in the Goodwin model is located in a closed orbit. 38
This result supports the idea that a capitalist economy is permanently oscillating.
While the dynamical behavior of the Kaldor model outlined in Section 2.2.2. depends
on the sign of the trace of the associated Jacobian, the trajectories of the Goodwin
model describe closed orbits independent of any special magnitude of the derivatives.
It may be that this oscillation property, together with the suggested analogy between
predator-prey interdependency and the class struggle, constitutes the main reason why
the Goodwin model found attention especially among political economists. 39 However,
the analogy is superficial and does not refer directly to the functional income shares of
capitalists and workers or even to their population size. Further, the Goodwin model can
be criticised along the same lines as was the case with the original Lotka/Volterra system
in biology, namely that the model is put together as an isolated set of assumptions
which do not satisfactorily reflect relevant influences. It may therefore be necessary to
investigate whether the Goodwin model is robust when facing modifications.

38 Goodwin (1967) investigated the solution to (2.4.10) by means of graphical inte-

gration. Cf. Gabisch/Lorenz (1989), pp. 153ff. for a presentation of Goodwin's
method.
39 Further developments of Goodwin's model can be found in Desai (1973), Velupil-
lai (1979), Pohjola (1981), Ploeg (1983, 1985), Flaschel (1984), and Glombowski/
Kriiger (1987).
60 Chapter 2

2.4.3. Predator-Prey Structures in Dissipative Systems

The Lotka/Volterra system (2.4.3) and its economic equivalent (2.4.10) are dynamical
systems whose behavior is very sensitive to variations in their functional structure.
Dynamical systems which change the character of their dynamical behavior under small
perturbations are called structurally unstable systems.
In order to demonstrate the effect of small perturbations, a basically arbitrary
modification of the original Goodwin model is undertaken in the following. 40 Instead of
assuming that the rate of change of the wage rate w depends only on the employment
rate v according to the usual Phillips relation, let this rate additionally be influenced
by the labor bill share u:
w/w = f(v) + g(u), (2.4.20)

and assume that g' (u) < 0, i.e., wage claims increase if workers are at a disadvantage in
the functional income distribution. The derivative g' (u) can be taken as being arbitrarily
small.
The effect of introducing g( u) i 0 can be seen immediately. The original Goodwin
equations (2.4.19) turn into

v= (1/a-- (<P + n)- ufa-)v

(2.4.21)
it = (- ( <P + 1) + pv + g( u)) u.
The Jacobian, evaluated at equilibrium, is

)·
0 -(<P + 1)/(a-p)
J= ( (2.4.22)
p(1 - ( <jJ + n)) g'(u)

While the determinant of J is still positive, the trace of J will be different from zero
even for a seemingly neglectable magnitude of g'(u). As the derivative is assumed to be
negative, the trace is negative. The real parts of the conjugate complex eigenvalues are
therefore negative and the equilibrium is locally asymptotically stable. System (2.4.21)
therefore possesses an attractor and has turned into a dissipative system.
Cugno/Montrucchio (1982b) investigated a similar modification of the Goodwin
model with an extended Phillips curve f( u, v) and were able to provide global stability
results. Other modifications of the original Goodwin model can easily be constructed.

40 Economically more reasonable modifications can be found, e.g., in Wolfstetter

(1982) in an investigation of the influence of stabilization policies in the Goodwin
model and in an elaborate discussion of Wolfstetter's results in Flaschel (1987).
However, the effects of these modification are not as easily to trace as the simple
perturbation given here.
 2.5. Irreversibility and Determinism 61

Samuelson (1971, 1972) demonstrated that the consideration of diminishing returns

in a general Lotka-Volterra framework can destroy the conservative character of the
system. 41
In general, any influence on the rate of change of one or both of the two variables
which depends on the value of this variable is equivalent to the introduction of a damp-
ening effect. The conservative dynamics of the original Lotka/Volterra equations will
thus be destroyed and the emerging system turns into a dissipative dynamical system.
The Goodwin model suffers from its inherent structural instabilty, as is the case
with any conservative dynamical system, and is therefore sensitive to (even numerically
small) modifications in its structure. As soon as a dissipative structure prevails, a
modified Goodwin model can exhibit converging or diverging oscillations as well as limit
cycles depending on the assumed damping or forcing terms. While the original model
is structurally unstable, modifications thereof nevertheless still allow for an oscillating
behavior of the economically most relevant magnitudes like the unemploymant rate and
the labor income share.

2.5. Irreversibility and Determinism in Dynamical Systems

This chapter concludes with a short discussion of time irreversibility inherent in many
dynamical systems. As described in the foregoing section, conservative dynamical sys-
tems are characterized by the presence of an infinity of closed orbits, i.e., arbitrarily
given initial points are located in one of these orbits.
Suppose that the motion of a conservative dynamical system starts at such an
arbitrary initial point. As time is assumed to be continuous, the dynamical system
starting at this point will continuously move in phase space and will eventually come
back to the initial point. Passing the initial point, the system will proceed in exactly
the same manner as during the first oscillation. If an observer of this motion knows the
underlying laws, i.e., the differential equation system, and the initial values of the state
variables at a given point in time, he will be (at least in principle) able to calculate
the location of the system in phase space by means of analytical or numerical methods.
Even if the initial point is not known precisely, the calculated trajectory starting at a
slightly different point in phase space will stay close to the original trajectory. Equally
important, if the dynamical system is conservative, it is possible to calculate the history
of a given point in phase space: as the system stays in a closed orbit forever, it also stayed
in the orbit in the past. The past can be calculated by simply reversing the direction

41 Samuelson did not refer specifically to the Goodwin model but to the biologically
oriented Lotka-Volterra framework. In the Goodwin model, diminishing or increas-
ing returns to scale can be taken into account by assuming that the capital-output
ratio a changes withY.
62 Chapter 2

of the time variable. Instead of counting time from t = 0 to t = oo in predicting the

future, let time run from t = 0 to t = -oo in describing the past. This property of
conservative dynamical system was responsible for Laplace's famous statement on the
predictability question ( cf. Chapter 1). In fact, many phenomena in celestial mechanics
can be described by conservative dynamical system with a high degree of accuracy, and
it was the precision of several predictions in classical mechanics which encouraged the
belief in the potential predictability of other dynamical systems in different fields.
Consider on the contrary a dissipative system which is characterized by the pres-
ence of (negative or positive) friction. A dissipative system always possesses attractors
or repellers, either in the form of fixed points, limit cycles, orbits in higher-dimensional
phase space, or strange objects which are to be introduced later in this book. A com-
pletely unstable dynamical system can be viewed as being attracted by infinity. In case
of these dissipative systems it may still be possible to predict the evolution of the sys-
tem in the future but it may be impossible to determine where the system started at a
certain point of time in the past.

I A
I
I
I
I
I
I
I
I
I
\
\
\
\
\
' ' ',
..... , ...... _____ ,.,..., "' B

Irreversibility in Dissipative Systems

Figure 2.16

For example, let a dissipative system possess a unique fixed point attractor of the
focus type. If the observer exactly knows the underlying laws of motion, he is able to
predict the state of the system in the future for every arbitrary initial point. Consider
the two different initial points A and B in Figure 2.16. In the limit, the trajectories
belonging to the two initial points will approach each other and will spiral toward the
fixed point attractor. Assume that the two trajectories need the same time until they
enter a certain ball around the fixed point. If the system is close to the at tractor and the
observer precisely knows the state of the system, then it is possible to calculate the past
of this point close to the equilibrimn. Moving backwards on the trajectory belonging to
 2.5. Irreversibility and Determinism 63

point A for the same time span as the forward motion will carry the observer to point
A again. However, a minor deviation of the estimated point from the actual point will
imply a divergence of the calculated backward trajectory from the actual one, because
an infinity of trajectories belonging to different initial points in phase space are located
in the ball around the attractor. The observer may thus incorrectly calculate point B
as the past of a point located in the ball around the equilibrium.
If the initial points of a dissipative dynamical system are located on the at tractor,
the remarks on the past and future predictability of conservative systems apply as well.
For example, if an initial point is located in a limit cycle42 the trajectory starting at this
point will eventually return to the initial point and complete prediction in both time
directions is possible. For all other initial points located on transients, the determination
of a point's past is possible only if the coordinates of that point are known with absolute
preciseness.

Time Reversible Time Irreversible

Dissipative Systems On an attractor On transients

Conservative Systems Everywhere Nowhere

Reversibility and Irreversibility in Dynamical Systems

Table 2.1

These properties are summarized in Table 2.1. As dissipative systems are dominat-
ing dynamical economics, it can be concluded that backward prediction is practically
impossible in most economic models. 43

42 The case of an initial point identical with a fixed point attractor is, of course,
trivial.
43 The claim for modelling time-irreversibilities often expressed by authors in the field
of the so-called evolutionary economics is therefore superfluous because it will be
difficult to construct economically reasonable time-reversible models.
Chapter 3

Bifurcation Theory in Dynamical Economics

This chapter deals with a subject that has become a major focus of research in dynamical
economics during the last decade, namely bifurcation theory. Central to this topic is
the question whether the qualitative properties of a dynamical system change when one
or more of the exogenous parameters are changing. In contrast to the physical sciences,
it is usually impossible to assign a definitive, once-and-for-all valid number to most
parameters occurring in dynamical systems in economics. Parameters are introduced
into an economic model in order to reflect the influence of exogenous forces which
are either beyond the scope of pure economic explanation or which are intentionally
considered as being exogenously given from the point of view of partial theorizing. It is
desirable to determine whether the qualitative behavior of a dynamical system persists
under variations in the parameter space. Thus, the results of bifurcation theory are
especially important to dynamic modelling in economics.
The bifurcation behavior of a dynamical system depends to some degree on the
involved time concept, i.e., whether the system is designed in continuous or discrete
time. 1 As some kinds of bifurcation occur in only one of these two types of dynami-

1 Although discrete-time dynamical systems can also occur in the form of Poincare
maps in the study of continuous-time systems, it will be assumed in the course of
 3.1. Bifurcations in Continuous-Time Dynamical Systems 65

cal systems, this chapter is separated into two sections, one which presents the most
important bifurcations in continuous-time systems and one which surveys discrete-time
systems. Though this may be viewed as being ponderous, the distinction forms a bridge
between the presentation of the regular nonlinear continuous-time systems of Chapter
2 and the introduction of chaotic discrete-time systems at the beginning of the next
chapter.
Both subsections contain a short description of the fold bifurcation, the pitchfork
bifurcation and the transcritical bifurcation for the sake of relative completeness. Cen-
tral to the presentation of the bifurcation behavior in both types of dynamical systems
is the Hop£ bifurcation which has recently gained the most attention in dynamical eco-
nomics. The presentation of the flip bifurcation, which occurs only in one-dimensional
discrete-time systems, will directly transfer to chaotic dynamics.
All types of bifurcations introduced in this chapter are local bifurcations in the
sense that only the behavior of a dynamical system in the neighborhood of a single
equilibrium point is affected. The global bifurcation behavior of a dynamical system
over the whole range of admissable values for the state variables will be discussed in the
next chapter.

3.1. Local Bifurcations in Continuous-Time Dynamical Systems

Consider the ordinary differential equation2

x=f(x,f..L), xER, f..LER, (3.1.1)

with f. L as a parameter. Assume that (3.1.1), for f. L = f-Lo, has an equilibrium point
( x *, f-Lo) such that 0 = f ( x *, f..Lo). The eigenvalue of ( 3.1.1) is given by A = 8 f ( x, f..L) /ox,
and it is well-known that the equilibrium point is locally asymptotically stable as long
as A < 0 at ( x*, f-Lo). Assume that at ( x*, f-Lo) the eigenvalue is equal to zero. It follows
from the implicit function theorem that the equilibria of (3.1.1) for values of f. L different
from f-Lo can be expressed as a smooth function x = x(f..L ). The function x(f..L) is called
a branch of equilibria. If at (x*, f-Lo) several branches of equilibria come together, the
point ( x*, f-Lo) is said to be a bifurcation point. The presentation of the branches of
equilibria in ( x - f..L) - space is called a bifurcation diagram. In Figure 3.1 the solid and
dashed lines depict branches of equilibria. The solid lines represent stable equilibria,
and the dashed line shows an unstable equilibrium.

this section that a discrete-time system emerges generically from a discrete time
concept.
2 The generalization of the notation to the n-dimensional case is straightforward. Cf.
Guckenheimer/Holmes (1983), pp. 118£. for the following definitions.
66 Chapter 3

x* unstable

Jlo
A Bifurcation Diagram
Figure 3.1

As can be seen from the bifurcation diagram, a formerly single equilibrium splits
(bifurcates) into several distinct equilibria at the bifurcation point. The value of 11 at
which the bifurcation occurs is called the bifurcation value of p. If no bifurcation occurs
at an equilibrium ( x*, 11 ), the equilibrium is said to be hyperbolic.
The bifurcation phenomenon can be related to the notion of structural stability.
A dynamical system is called structurally stable if the qualitative dynamical properties
of the system persist with small variations in its structure, i.e., when varying the pa-
rameters or considering small perturbations of the system. For example, if a dynamical
system possesses a unique and asymptotically stable equilibrium, structural stability
implies that the equilibrium is unique and asymptotically stable for different parameter
values as well. In other words, a dynamical system is structurally stable if the flow of
a slightly varied system is topologically equivalent to the original flow, i.e., if the two
trajectories stay close together. 3 A bifurcation value p 0 is therefore a value of 11 for
which the dynamical system is structurally unstable. 4

3.1.1. Fold, Transcritical, and Pitchfork Bifurcations

The following types of bifurcation will be presented only for the one-dimensional case

3 Cf. Arnold (1982), Chapter 3, and Vercelli (1984), appendix, for a discussion of
several concepts of structural stability.
4 Cf. also the. definitions in Chapter 6 dealing with catastrophe-theoretic approaches
to dynamical systems where the notion of structural stability refers to the algebraic
properties of functions and not to the topological nature of dynamical systems.
 3.1. Bifurcation in Continuous- Time Dynamical Systems 67

though these bifurcations can occur in higher-dimensional systems as well.

Fold Bifurcation
Consider the differential equation (3.1.1) and let (x*, fLo)= (0, 0) for simplicity.

Theorem 3.1 (Fold Bifurcation) 5

Let fin (3.1.1) be C 2 and assume that there is an equilibrium point ( x*, fLo) =
(0, 0). If

(1) aj(O, 0) =.A= O,

ax
a2 J(o, o) _j_
0
(2)
ax 2 -r '
aj(O,O) 40
(3) aiL -r ,

then, depending on the sign of the expressions in (2) and (3), there are
i) no equilibria near (0, 0) if fL < 0 (IL > 0), and
ii) two equilibria near (0, 0) if fL > 0 (IL < 0).
The fold bifurcation is sometimes also called a Jaddle-node bifurcation. Conditions (2)
and (3) are called tranJverJality conditions. 6
Figure 3.2 illustrates the fold bifurcation for the prototype equation x = jl.- x 2 • The
signs of the transversality conditions (2) and (3) are negative and positive, respectively.
If the parameter fL is lower than the bifurcation value fLo = 0, no equilibrium exists.
For fL > fLo, two branches of equilibria emerge, one being stable and the other being
unstable. Alternatively, if (3) has a negative sign, the bifurcation diagram would appear
mirror-imaged with respect to the x-axis. If (2) and (3) are both positive, the stability
of the two equilibrium branches is reversed.
As an economic example of the fold bifurcation consider a simple partial-analytical
model of the labor market. Let £8( w) and £d( w) be the supply of and demand for labor,
respectively, which both depend on the real wage w. The change in the real wage rate
is assumed to depend on the excess demand for labor in this market, i.e.,

f3 > 0. (3.1.2)

5 Cf. GuckenheimerjHolmes (1983), pp. 146 ff. for a generalized version of the
theorem for the case x E Rn. The following version is related to Whitley's (1983)
formulation for discrete maps.
6 In the present context "transversality" should be read as "the most general descrip-
tion of a family of functions at a bifurcation point".
68 Chapter 3

x*
!

- +-X !
" ---
f
--
......
p2 ......

Po ! ! p
P1 Po
P2 >Po > P1

3.2.a: The Phase Portrait 3.2.b: The Bifurcation Diagram

The Fold Bifurcation
Figure 3.2

Let fd( w) = p- bw. Assume that the labor supply function reflects an inferiority for high
values of w, i.e., that the income effect is negative. Assume further that the income effect
dominates the substitution effect. The supply function is therefore bending backwards
for high values of w ( cf. Figure 3.3).

12 li
A Labor Market with an Inferiority in the Labor Supply
Figure 3.3

In detail, let 8 2 £8 ( w) I 8w 2 < 0 and 8£ 8 ( w) I aw < 0 for w greater than a Wo 0

Denote the right-hand side of (3.1.2) as f(w, p) and let po be the value of p such that
f(w, p 0 ) = 0 and 8f(w, p 0 )18w = 0, i.e., there is an equilibrium where the demand and
 3.1. Bifurcation in Continuous-Time Dynamical Systems 69

supply functions are tangent. Obviously, 8j2(w, p0 )/8w 2 > 0 and 8f(w, p0 )/8p > 0,
and the conditions (2) and (3) of Theorem 3.1 are fulfilled. Thus, a fold bifurcation
occurs at the bifurcation value Po· For p > Po no equilibrium exists. If p < po, two
branches of equilibria emerge, one being stable and the other being unstable. Figure
3.4 shows the phase portrait and the bifurcation diagram for this simple labor market
model.

t t
--- "'- .....

"" t
w
~
t t ~
Po

3.4.a: The Phase Portrait 3.4.b: The Bifurcation Diagram

A Fold Bifurcation in the Labor Market
Figure 3.4

Transcritical Bifurcations
The fold bifurcation implies that no equilibrium exists for parameter values smaller
((3) negative) or larger ((3) positive) than the bifurcation value. However, it often
occurs in practical applications that dynamical systems have at least a so-called trivial
equilibrium at the origin. The tran3critical bifurcation deals with the exchange of
stability of a persisting equilibrium. If the equilibrium persists under variations in p,
then f(O, p) = 0 Vp. As this contradicts the transversality condition (3) in Theorem
3.1, that condition will be replaced by condition (3') in the next theorem.

Theorem 3.2 (Transcritical Bifurcation)

Let fin (3.1.1) be C 2 and assume that there is an equilibrium point (x*, po) =
(0, 0). If

(1) 8f(O, 0) = ,\ = O,
ax
70 Chapter 3

(2)
iP f(O, 0) -'- 0
oxz r '
(3') 8! (0, 0)
2 i- 0
(8p8x) '
then, depending on the sign of the expressions in (2) and (3'),
< 0 (Jl > 0), and
i) the equilibrimn x* is stable (unstable) for J1
ii) the equilibrium x* becomes unstable (stable) for 11 > 0 (p < 0) and a
branch of additional stable (unstable) equilibria x(p) emerges.
The transcritical bifurcation is thus characterized by an exchange of stability of the ori-
gin. Figure 3.5 shows the phase portrait and the bifurcation diagram of the transcritical
bifurcation for the prototype equation :i; = px- x 2 . The sign of the transversality con-
ditions (2) and (3') are negative and positive, respectively. For 11 < Jlo = 0 the origin
x = 0 is the only equilibrium point which is stable. If 11 > p 0 , the equilibrium x = 0
becomes unstable and a new equilibrium line x*(p) emerges which is stable.
If the sign of (3') were reversed, the bifurcation diagram in Figure 3.5.b would
appear mirror-imaged. If (2) had a positive sign, the stability of the equilibrium for
different J1 would be reversed.

x*

I
I / - "' \:· . - ·-
....

\
X

l
I
I
I 0
I
I

I l
p<O J1 > 0
J1 =0
J1

3.5.a: The Phase Portrait 3.5.b: The Bifurcation Diagram

The Transcritical Bifurcation
Figure 3.5

A simple economic example of a transcritical bifurcation in a one-dimensional system

can be constructed from standard neoclassical growth theory. Consider the familiar
adjustment equation in a one-sectoral growing economy

k= sy(k)- nk, (3.1.3)

 3.1. Bifurcation in Continuous-Time Dynamical Systems 71

sy(k, p 1 )

y'(k, P2)
y'(k, P1)
k

A "Neoclassical" Production Function with Incomplete lnada Conditions

Figure 3.6

with k as capital intensity, y( k) as per-capita-output, n as the labor growth rate, and s

as the savings rate. The production function y( k) is usually assumed to fulfill the lnada
conditions, i.e., i) y(O) = 0, ii) y'(k) > 0, iii) y"(k) < 0, and iv) y'(O) = oo. Assume
that conditions i) - iii) hold but that the slope of y depends upon a parameter p, with
y~(O)I~t=O = 0 and 8y~(k)f8p, > 0\fk. (Cf. Figure 3.6).

k k

3.7.a: p, < P,o 3.7.b: p, > P,o

Phase Portraits in a Neoclassical Growth Model for Different p,
Figure 3.7

Define p, 0 as the value of p, such that, for given n and s, sy~ 0 (0) = n, i.e., A = 0.
If p, < p, 0 , A is negative and the origin is a stable equilibrium. Let p, = p,o. The
transversality conditions are fulfilled by assumption, i.e., s8y~(k)/ 8p, > 0 and y~(k) < 0.
72 Chapter 3

Thus, a transcritical bifurcation occurs at 11 = /lo such that the origin becomes unstable
and new equilibria k* > 0 emerge in a neighborhood of k = 0 for increasing 11· Figures
3.7.a and 3.7.b show the phase portraits for the two cases 11 < /lo and 11 > /lO·

Pitchfork Bifurcation
A final example of a bifurcation of an equilibrium into two or more stable and unstable
equilibria is the so-called pitchfork bifurcation. This bifurcation can occur in dynamical
systems of the form (3.1.1) with the additional assumption that the function f is an odd
function with respect to x, i.e., f(x, ·) = - f( -x, ·). 7 When f is an odd function, then
the sufficient conditions for a transcritical bifurcation are not fulfilled since condition
(2) in Theorem 3.1 will be violated for at least one x. Condition (2) will be replaced
by the requirement that the third partial derivative with respect to x is different from
zero.

Theorem 3.3 (Pitchfork Bifurcation)

Let fin (3.1.1) be C 3 and assume that there is an equilibrium point (x*, !lo) =
(0, 0). If

(1) 8/(0,0) = ,\ = 0
ax '
8 3 /(0, 0) 4 O
(2')
8xa r '

(3')
8 2 /(0,
0) f. 0
(8118x) '
then, depending on the sign of the expressions in (2') and (3'),
i) the equilibrium x* is stable (unstable) for 11 < 0 (!1 > 0), and
ii) the equilibrium x* becomes unstable (stable) for 11 > 0 (!1 < 0) and two
branches of additional stable (unstable) equilibria x(11) emerges.
Figure 3.8 shows the phase portrait and the bifurcation diagram for the prototype
equation x = /lX -x 3 . The signs of the transversality conditions (2') and (3') in Theorem
3.3 are negative and positive, respectively, such that a so-called supercritical pitchfork
bifurcation occurs with the bifurcating branches representing stable equilibria.
As in the case of the transcritical bifurcation, the bifurcation diagram in Figure 3.8
would appear mirror-imaged if the sign of (3') were reversed. If (2') were positive, then

7 Cf. Section 2.3. for the relevance of odd functions in the Lienard equation. The
trivial example of a linear odd function is a straight line with nonzero slope passing
through the origin.
 3.1. Bifurcation in Continuous-Time Dynamical Systems 73

X
x*

t
t
------~--------------~p

3.8.a: The Phase Portrait 3.8.b: The Bifurcation Diagram

The Pitchfork Bifurcation
Figure 3.8

the two emerging additional equilibria would be unstable. In that case, a subcritical
pitchfork bifucation would occur.
As an economic example, consider an abridged version of the Kaldor model pre-
sented in Section 2.2.2. Assume that the investment function has the same shape as in
Figure 2.8, but let investment be independent of the capital stock. 8 The model then
reduces to the single goods market adjustment equation

Y = a(I(Y)- S(Y)) (3.1.4)

with the usual meaning of the symbols. Let Y* be the "natural" income level, and
formulate (3.1.4) in terms of the deviations from the appropriate I* and S* levels:

y = a(i(y)- s(y)), (3.1.5)

with y = Y- Y*, i = I- I*, and s = S- S*. Assume further that the investment
function can be parametrized such that the slope of i(y) decreases for all y when a
parameter p, is decreased, i.e., the investment response to deviations from the natural
income level is getting smaller. In formal terms, let os(y)foy be a constant and assume
oi 2 (y,p,)f(oxop,) > 0. The Kaldor assumption on the investment function implies
oi 3 (y,p,)foy 3 > ovy.
Figure 3.9 shows the equilibrium constellations for values of the parameter such
that the natural equilibrium level of income is unstable (solid line) and stable (dashed
line).

8 This is, of course, the standard short-run macroeconomic approach, assuming that
in the short-run the influence of investment on the capital stock can be neglected.
74 Chapter 3

y
I

~---1 ~---
I
I

A Parametrized Kaldorian Investment Function

Figure 3.9

y y
\

''\

- '\
\
\

' ' ... ..

-
----------~~~-----------.~y
''
'\ \
\

.
\
\
\

3.10.a: fl < flo 3.10.b: fl >flo

Phase Portraits of an Abridged Kaldor Model for Different fl
Figure 3.10

Define flo as that parameter value for which the eigenvalue of (3.1.5) is zero, i.e.,
a(8i(y, flo)/8y- 8s(y)j8y) = 0. Then the conditions of Theorem 3.3 are fulfilled and
a pitchfork bifurcation occurs at flo· Figure 3.10 shows the phase portraits for different
values of fl in this abridged Kaldor model.

Summary

The different bifurcation types with the associated transversality conditions and the
 3.1. Bifurcations in Continuous-Time Dynamical Systems 75

prototype equations are summarized in Table 3.1 for the case n = 1. The table also
includes the Hopf bifurcation to be presented in the next section.

Eigenvalue Transversality Cond. Prototype Equation

Fold .\=0 of foi-l i= o x = IJ- x 2

Bifurcation o2 f fox2 i= o

Transcritical .\=0 o 2 f j(o~Jox) "/= 0 x = !JX- x 2

Bifurcation o2 f jox2 i= o

Pitchfork .\=0 o 2 f /( OIJOX) "/= 0 x = !JX- x 3

Bifurcation 03 f jox3 "/= 0

-
Hopf .\;, .\; E C x=-y+x(~J-
Bifurcation Re.\; = 0 (x2 + y2))
oRe.\;
--> 0 Y =X +Y(IJ-
OIJ
(x2 + y2))

Bifurcation Types in Continuous-Time Dynamical Systems

Table 3.1

All three of these bifurcation types can occur in higher-dimensional continuous-

time dynamical systems as well. The requirement ,\ = 0 in Table 3.1 then has to be
replaced by the condition that out of the n eigenvalues a single eigenvalue is zero while
k eigenvalues are positive and n - k - 1 eigenvalues are negative. Furthermore, the
conditions on the single partial derivatives must be replaced by the appropriate matrix
expressions. 9

3.1.2. The Hopf Bifurcation in Continuous-Time Dynamical Systems

The types of bifurcation presented in the foregoing section deal with the emergence of
additional branches of equilibria or with the exchange of stability between two branches
of equilibria. While these bifurcations are important dynamical phenomena, another

9 Cf. Sotomayor (1973) for further details.

76 Chapter 3

kind of bifurcation deserves attention in dynamical systems theory, namely the bifurca-
tion of a fixed point into a closed orbit in a neighborhood of the equilibrium. In contrast
to the other bifurcations which may arise already in one-dimensional dynamical systems,
the Hopf bifurcation in continuous time requires an at least two-dimensional system. 10
Consider the continuous-time system

x = f(x,p,), x ERn, p, E R. (3.1.6)

Assume that (3.1.6) possesses a unique equilibrium x* for a p, 0 , i.e.,

x= 0 = f(x*,p,o). (3.1.7)

Furthermore, assume that the determinant of the Jacobian matrix J of (3.1.6), i.e.,

det J (3.1.8)

differs from zero for all possible equilibria (x, p,). Consider a neighborhood Br(P,o) E R
of the parameter value p, 0 • Then the implicit function theorem ensures the existence
of a smooth function x* = x*(p,) for p, E Br(P,o); i.e., for every p, in the neighborhood
there exists a unique equilibrium x*.
Assume that this equilibrium is stable for small values of the parameter p,. The
Hopf bifurcation theorem establishes the existence of closed orbits in a neighborhood of
an equilibrium for appropriate values of the parameter p,.U

Theorem 3.4 (Hopf bifurcation - Existence Part)

Suppose that the system (3.1.6) has an equilibrium (x*, p, 0 ) at which

the following properties are satisfied:

10 As a reminder, compare the discussion of linear one-dimensional systems in Section

1.2. for the fact that in those systems only monotonic motion can prevail. The
same is true for the nonlinear analogue.
11 There exist several versions of the Hop£ bifurcation theorem. The following is a
truncated version of Guckenheimer/Holmes (1983), p. 151 ff. For other versions
see, e.g., Alexander/Yorke (1978) and Marsden/McCracken (1976). Compare also
Hassard et al. (1981).
 3.1. Bifurcation in Continuous- Time Dynamical Systems 77

i) The Jacobian of (3.1.6) has a pair of pure imaginary eigenvalues

and no other eigenvalues with zero real parts.
This implies that there is a smooth curve of equilibria (x*(J.L), J.L) with
x* (J.Lo) = x*. The complex conjugate eigenvalues >.(J.L ), 5..(J.L) of the
Jacobian which are purely imaginary at J.L = J.Lo vary smoothly with
J.L. If moreover
") d(Re>.(J.L))
11 > 0,
dJ.L ill=llo

then there exist some periodic solutions bifurcating from x*(J.Lo) at

J.L = J.Lo and the period of the solutions is close to 271' / (30 ((30 =
>.(J.Lo)/i).

Im

(a.,{3)

Re
..........
........0 '
',
," ..... ·. ·· ...........' '
, ,
.....
' ' ,..
/ / ~ (a.,-{3 )

The Eigenvalues in the Hopf Bifurcation

Figure 3.11

When J.L is increased from J.L < J.Lo to J.L > J.Lo, the single fixed point changes its stability
because the real parts Re).. become positive. Figure 3.11 shows the Gaussian plane with
complex conjugate eigenvalues before and after a Hopf bifurcation. The phase portraits
for different parameter values are shown in Figure 3.12. Theorem 3.4 establishes only
the existence of closed orbits in a neighborhood of x* at J.L = J.Lo, and it does not say
anything about the stability of the orbits. Indeed, the closed orbits may arise on either
side of J.Lo.
Consider first the so-called subcritical case, in which closed orbits arise at J.L < J.Lo.
Closed orbits exist around stable fixed points x*(J.L). For J.L > J.Lo, the equilibria are
unstable and no orbits exist. Figure 3.13 illustrates this subcritical Hopf bifurcation in
the two-dimensional case. All points on the J.L axis represent equilibria of the system.
Trajectories starting at initial values in a neighborhood of the orbits are repelled from
78 Chapter 3

X2 x2

,----4-.. . . . ... ...,

/
," ''
'' ''
I
I/
,-~
\
\ '~

'
-r--- .... --\-. \ •
I
\
\
\
' ... __ ~...
4

I
I
:
I
I
I
I
I

'
. . . . . . ___ 1"llf
I
,' I

/
I
I
I

I
"

3.12.a: J1. < J-Lo 3.12.b: J1. = J-Lo 3.12.c: J1. > J-Lo
The emergence of a closed orbit in the Hopf bifurcation
Figure 3.12

these orbits: initial points outside the orbits spiral away from the orbits, initial points
inside the orbits are attracted by the equlibrium points. 12

,.K

I
/ " ,. - ,
I I \

The Subcritical Case

Figure 3.13

12 Cf. Benhabib/Miyao (1981) for economic interpretations of subcritical bifurcations.

The fact that the closed orbit defines a basin of attraction can be used to relate the
subcritical Hop[ bifurcation to the notion of corridor stability : as long as an initial
point x(O) is located inside a region bounded by the closed orbit, x(t) will stay in
the corridor defined by the orbit and will eventually con verge toward x*.
 3.1. Bifurcation in Continuous-Time Dynamical Systems 79

In the second case of the so-called supercritical Hopf bifurcation the orbits arise for
p, > p, 0 . The fixed points x*(p,) are unstable, and the orbits are attracting. For p, < p, 0
the fixed points are stable and no orbits exist (cf. Fig. 3.14).

jJ
\ ' -~

"'"--

The Supercritical Case

Figure 3.14

As a formal example of the occurrence of the Hopf bifurcation, consider the proto-
type differential equation system

x = -y + x (p,- (x 2 + y 2 ))
(3.1.9)
if = x + y (p, - ( x2 + y2)).
System (3.1.9) possesses an equilibrium with x =if= 0 at x* = y* = 0. The Jacobian
matrix of (3.1.9) is

(3.1.10)

or, evaluated at equilibrium,

(3.1.11)

The determinant of (3.1.11) is det J = p, 2 + 1, and the trace is trJ = 2p,. It follows that
J
the eigenvalues are A1 ,2 = p, ± p, 2 - p, 2 - 1 = p, ±A. For p, = 0, the eigenvalues are
purely imaginary, and 8 (Re.A;)/8p, = 1 > 0. The requirements i) and ii) of Theorem
80 Chapter 3

3.4 axe therefore fulfilled and system (3.1.9) undergoes a Hop£ bifurcation at (0, 0) if
f.L = f.Lo = 0.
While the existence of closed orbits via the Hop£ bifurcation theorem can relatively
easily be established in most cases, the distinction between the sub- and supercritical
Hop£ bifurcation is much more difficult. The usual procedure in determining which case
prevails will be demonstrated with the prototype equations (3.1.9)_13
Evaluated at the bifurcation point (x*, y*, f.Lo) = (0, 0, 0), the dynamical system
(3.1.9) can be written as

( ~)
y
= (0 -1) (x) + (-x3
-xy2)
1 0 y -x2y- y3
(3.1.12)

=L·( ~) + g(x, y).

If the matrix L possesses a form as in (3.1.12), the dynamical system is said to be
written in normal form. As most generic dynamical systems do not appear in this form,
a transformation into normal form is necessary for the stability analysis below. An
example will be provided in the next subsection.
The stability properties of the closed cycles depend on the nonlinear terms g( x, y)
because in the Hop£ bifurcation the real parts of the eigenvalues of J, i.e., of the linear
approximation, vanish. It can be shown that the stability of the emerging cycle depends
on up to third-order derivatives of the nonlinear functions g in (3.1.12). Consider the
expression14

b 1(1 1 2
= 16 9xxx + 9xyy + 9xxy 2)
+ 9yyy
(3.1.13)
+ 161{3 (1(1 1)
9xy Yxx + 9yy - 2(2
9xy 9xx
2) - 9xx9xx
+ 9yy 1 2 + 9yy9yy
1 2) '

where the subscripts denote the partial derivatives with respect to the arguments x and
y, respectively. The emerging cycle is attracting if b < 0; it is repelling if b > 0.
With g 1(x,y) = -x 3 - xy 2 and g 2(x,y) = -x 2y- y 3 , the partial derivatives are

Y!x = -6x, Y!y = -2x, Y!y = -2y,

9;y = -6y, 9;x = -2y, 9;y = -2x,
13 Cf. Guckenheimer/Holmes (1983), pp. 150-156, or Marsden/McCracken (1976),
pp. 63ff. and pp. 137ff. for discussions of this procedure.
14 Cf. Guckenheimer/Holmes (1983), p. 152. The expression (3 is the square root in
..\=a+ (Ji. In the Jacobian matrix (3.1.11) (3 is equal to 1.
 3.1. Bifurcation in Continuous- Time Dynamical Systems 81

It follows that b = -16/16 = -1 < 0. The emerging cycle of system (3.1.9) is therefore
attracting, i.e., a supercritical Hop£ bifurcation has occurred.
This procedure can imply technical difficulties during the necessary transformation
of the generic system to the normal form (3.1.12). Furthermore, in the n-dimensional
case (n ~ 3) a reduction of the dynamical system to its center manifold 15 must be per-
formed, which in most cases is impossible in face of the typically numerically unspecified
economic models. Occasionally, the stability of the emerging cycle can be established
much easier when the dynamical system is algebraically specified. In polar coordinates
system (3.1.9) can be written as

r= (Jl- r 2 )r
(3.1.14)
~ = 1,

with r as the radius of the emerging cycle and <P as the angle which a straight line from
the origin to a point on the cycle describes with the abscissa. For Jl < Jlo = 0 the radius
r converges to r = 0. For Jl > 0, the radius converges to r = VJI. The spiralling motion
is counter-clockwise because ~, i.e., the motion of the angle, is positive.

Summary

In order to demonstrate the existence of a Hop£ bifurcation in a concrete system it is

thus sufficient to show that by increasing the control parameter Jl

• complex roots exist or emerge,

• the real parts of the pairs of complex conjugate roots are zero at the bifurcation
value Jl = Jlo,
• all other real roots differ from zero at Jl = Jlo,
• the real parts differ from zero for Jl > Jlo.

In addition, the stability of the emerging cycles should be studied with the help of the
method mentioned above.
Though applications of the Hop£ bifurcation theorem (and especially its existence
part) are generally not restricted to low-dimensional dynamical systems, conditions i)
and ii) in Theorem 3.4 can be shown to be fulfilled without difficulty only in two- and
three-dimensional cases. In higher-dimensional systems with n ~ 4 the bifurcation
values Jlo can often be calculated only by means of numerical algorithms.

15 Cf. Guckenheimer/Holmes (1983), pp. 123 ff.

82 Chapter 3

3.1.2.1. The Hopf Bifurcation in Business Cycle Theory

In this section two applications of the Hopf bifurcation theorem in business cycle theory
and in optimal control theory will be presented. 16 The cases n = 2 and n 2: 3 will be
treated in separate subsections because the computational effort is slightly different in
both cases.

The case n =2
Recall the familiar Kaldor model outlined in Section 2.2.2, which serves as a prototype
model in nonlinear dynamical economics:

Y= a(I(Y, K)- S(Y))

(3.1.15)
K= I(Y, K) - fJK.

In order to avoid possible conflicts with the assumptions of some theorems, perform a
coordinate transformation such that the system is centered at the stationary equilibrium
(Y*,K*). Let y = Y*- Y, k = K*- K, i =I*- I, and s = S*- S. The systems
(3.1.15) then turns into
y = a(i(y, k)- s(y))
(3.1.16)
k=i(y,k)-fJk
Assume that s(y) is linear, and that i(y, k) can be separated such that i(y, k) = i 1 (y) +
i 2 (k). The part i 2 (k) is assumed to be linear. For the derivatives of i 1 (y) assume that
i~(O) > 0, i~y(O) = 0, and i~yy(O) < 0.
The Jacobian of (3.1.16) is

a(iy-sy)
J= ( (3.1.17)
Zy

with the determinant

(3.1.18)

and the trace

tr J = a(iy- sy) + (ik- fJ). (3.1.19)
The characteristic equation is
(3.1.20)

16 Cf. Feicbtinger/Sorger (1986) and Semmler (1986) for other economic applications
of the theorem:
 3.1. Bifurcation in Continuous-Time Dynamical Systems 83

with a= -tr J and b = det J. The eigenvalues are

>.1,2 = -a/2 ± J a 2 /4- b, (3.1.21)

and it follows that the equilibrium is locally stable if and only if the real parts are
negative. As b must be positive ( det J > 0) in order to exclude a saddle point, the
stability criterion reduces to the condition of a positive coefficient a of (3.1.4). The
equilibria are therefore asymptotically stable if a = -tr J > 0 => tr J < 0:

o:(iy- sy) + (ik- c5) < 0. (3.1.22)

According to Theorem 3.4, a Hopf bifurcation occurs if the complex conjugate roots
cross the imaginary axis. Apparently, the roots are complex conjugate with zero real
part if a = 0. As there are no other real roots in this two-dimensional example, the
consideration of the existence of closed orbits is complete if the eigenvalues cross the
imaginary axis with nonzero speed at the bifurcation point.
Though there may exist several possibilities to parametrize the Kaldor model, the
choice of the adjustment coefficient o: on the goods market as the bifurcation parameter
seems to be obvious. 17 With (iy - sy) > 0 at the stationary equilibrium and ik
constant, it can directly be seen that there exists a value o: = o: 0 for which

o:o(iy- sy) + (ik- c5) = 0, (3.1.23)

implying that the complex conjugate roots cross the imaginary axis. As, foro: > o: 0 , the
real parts are becoming positive, o: 0 is indeed a bifurcation value of the Kaldor model.
Inspection of (3.1.17) shows that the model is not expressed in its normal form.
Evaluated at the bifurcation point, the centered Kaldor model reads

-ik(ik- c5)/(iy- sy)) (y)

Zk-
0c5 k + g ( y, k) ' (3.1.24)

with g(y, k) as nonlinear terms which can be derived from a Taylor expansion of (3.1.16).
As the expression (3.1.13) contains up to third-order derivatives, the function g(y, k)
must be at least C 3 • As it was assumed that i(y, ·) is the only involved nonlinearity,
the nonlinear part g(y, k) reduces to

g 1(y) = o: 0 i(y)- Lt (i(y)) = o:oi(y) + (ik- c5)y

(3.1.25)
l(Y) = i(y)- L2(i(y)) = i(y)- iyy

17 Cf. Dana/Malgrange (1984) for an investigation of the effects of different values of

o: in a discrete-time version of the Kaldor model. Compare also Section 4.1.5.
84 Chapter 3

with L;(i(y)) as the linear parts in the two equations of system (3.1.16).
In order to carry out the necessary coordinate transformation consider the matrix 18

(3.1.26)

and let
du =0
d12 = 1
J-i(fu- !22) 2 - !12!21
d21 = ~----------------
!J2
d _ _ fn- !22
22- 2!12

with J;i as the entries in the Jacobian (3.1.17), evaluated at the bifurcation point.
The inverse of D is

- d21 -d21
1
n-1- - - (-d22 -1)
0 .
(3.1.27)

D transforms system (3.1.24) into a new coordinate system (u,v). The linear part
transforms into

(3.1.28)

i.e., into the normal form with fi 2d21 = J(ik- 8) 2 + ikiy(ik- 8)/(iy- sy)· The non-
linear terms gi(y) turn into

( g~(v)) = n-1 (aoi(y)- L1(i(y)) oo) D

g (v) i(y)- L 2(i(y))

=D_ 1 (0 a 0i(v)-L1(i(v))) (3.1.29)

0i(v)- L 2(i(v))

= _ _2_ (0 d22(aoi(v)- L1(i(v)))- i(v)- L2(i(v))).

d21 0 -d21 (a 0i(v)- L 1(i(v)))

18 The following transformation is adopted from Herrmann (1986), pp. 89ff.

 3.1. Bifurcation in Continuous-Time Dynamical Systems 85

The functions
91 ( v ) = --d
d22 (
aot v + tk- 6 v +
'( ) (. ) ) i( v)d+ iyv
21 21

(3.1.30)

92(v) = aoi(v)- iyv

depend only on the new variable v. Expression (3.1.13) therefore reduces to

(3.1.31)

The partial derivatives of gl in (3.1.31) are

1- d22ao .
lvv = 0
1
g =
vv d21

g;v = aoivv = 0
1 1- d22ao
9vvv = d lvvv ·
21
As ivvv is negative by assumption, the expression b is negative if (1 - d22 a 0 )/d21 is
positive. The reader may verify that the assumptions made thus far are not sufficient to
establish a positive sign of the coefficient. Whether or not the cycle is indeed attracting
depends on the particular numerical specification of the model.
In the two-dimensional case the use of bifurcation theory actually provides no new
insights into known models. The existence of closed orbits in the Kaldor model can also
be established via the Poincare-Bendixson theorem. In many applications, however,
it may be easier to use bifurcation theory rather than, e.g., the Poincare-Bendixson
theorem, because it may be more difficult to find the necessary invariant set on whose
boundary the vector field points inwards than to calculate the bifurcation values.

The case n ~ 3
In the three- and higher-dimensional case the Poincare-Bendixson theorem cannot be
applied anymore. The Hopf bifurcation theorem may constitute the only tool to estab-
lish the existence of closed orbit.
As an example consider an augmented IS-LM business cycle model: 19

Y= a(I(Y,K,r)- S(Y,r))
r = f3(L(r, Y)- M) (3.1.32)
K = I(Y, K, r) - 6K

19 Compare Boldrin (1984) for a similar model.

86 Chapter 3

with r as the interest rate, L(r, Y) as the money demand, and Mas the constant money
supply.
The Jacobian of (3.1.35) is

a(ly- Sy) a(Ir- Sr)

J = ( (3Ly f3Lr (3.1.33)
Jy Ir
with the characteristic equation

>. 3 + a>. 2 + b>. + c = 0 (3.1.34)

and
a= -trJ = - (a(ly- Sy) + f3Lr + (IK- 8))
b = f3Lr(IK- 8) + a(!y- Sy)(IK- 8)- alylK (3.1.35)
+ a(3(!y - Sy )Lr- a(3Ly(lr - Sr)
c =- det J.

The coefficient b represents the principal minors of the Jacobian J.

In case of a third-order polynomal like (3.1.34) it is a little bit more difficult to
examine the qualitative properties of the eigenvalues. Equation (3.1.34) has one real
and two complex conjugate roots if the discriminant

(3.1.36)

is positive with

(3.1.37)

While in the two-dimensional case the stability of the equilibrium is determined

by the sign of the trace of J, the three-dimensional case is slightly more difficult to
analyze. A very helpful criterion in proving the local stability of a dynamical system is
the Routh-Hurwitz criterion. 20 In the three-dimensional case the real parts of the roots
are negative if
a, b, c > 0 and ab - c > 0. (3.1.38)

20 See, e.g., Dernburg/Dernburg (1969), pp. 214 if. or Gandolfo (1983), p. 248ff.
 3.1. Bifurcation in Continuous-Time Dynamical Systems 87

Making use of the fact that

3 3
I:>.;= -a and IT>.;= -c,
i=l i=l

it can be shown that the real parts of the complex conjugate roots are zero and that
there is no other real root which equals zero if

a, b, c -# 0 and ab - c = 0. (3.1.39)

Assume that the discriminant~ in (3.1.36) is always positive in order to assure that the
three roots consist of one real and two complex conjugate roots. Let a be the bifurcation
parameter. If the coefficients are positive by assumption, the complex conjugate roots
cross the imaginary axis at a = a 0 , where ab-c = 0 is fulfilled. Further, the real
eigenvalue is negative because the sum of the three eigenvalues is negative. The equation
ab-c= 0 is a quadratic implicit function in a for the expressions a, b, and c in (3.1.35).
It is thus possible that two positive values of a occur.
The expression ab-c decreases when a is increased at a 0 because of 8a/8a < 0,
8b/8a < 0, and 8c/8a > 0. The real parts are becoming positive and the fixed points
(Y, K, r )ja>ao become unstable. Thus, it has been established that closed orbits arise at
a = a 0 • In order to perform a stability analysis of the emerging cycles by means of the
same method as in the last subsection, it is necessary to reduce the three-dimensional
system (3.1.35) to its center manifold. 21 The calculations are tedious, and there is not
much hope to derive simple stability conditions.

3.1.2.2. Closed Orbits in Optimal Economic Growth

The Hopf bifurcation theorem can be applied to economic models in other fields than
business cycle theory which is explicitly attempting to model oscillatory motions. It
can be shown that closed orbits exist in several models which have traditionally been
characterized by more or less monotonic time paths of its variables.
For example, the literature on optimal economic growth is guided by the basic
paradigm that it is possible to control the development of an economy according to
a well-specified welfare criterion by means of suitable choices of incentives for capital
accumulation, determinations of the discount rate, etc. According to the linear world-
view, the optimal path which maximizes the welfare criterion has to be an equilibrium

21 Cf. Guckenheimer/Holmes (1983), pp. 123/f. Economic examples of the use of

center manifolds in the investigation of higher-dimensional systems can be found
in Chiarella (1986) and in Reichlin (1987).
88 Chapter 3

path characterized by a monotone development of the variables. It has been the implicit
aim of control theory to prevent fluctuations of major variables by proposing values of
the control variables which are theoretically suited for a dampening of the oscillations
in an economy. Obviously, the basically static concept of general equilibrium analysis
with its well-known welfare implications has had its impact on valuations of dynamic
optimization procedures: a trajectory which maximizes a welfare criterion was believed
to be characterized by a monotone succession of equilibria. In the context of optimal
growth theory this can only imply that the values of the major variables are perma-
nently increasing over time. As fluctuations within an economy were considered to be
disadvantageous per se, i.e., without explicit welfare considerations of oscillations, the
phenomenon of the occurrence of oscillations in optimal growth models has been ignored
for a long time.
The literature on optimal control in the 1970s was dominated by the search for
the assumptions necessary to garantuee the saddle-point stability of an optimal control
trajectory: One and only one trajectory exists such that all initial points located on
this trajectory eventually converge to a stationary equilibrium point. If an initial point
is not precisely located on this saddle, it will never reach the equilibrium. Actually, the
saddle-point characteristic of most optimal control models constitutes a negation of the
practical controllability of an economy because it shows that the probable imprecision of
the involved information will prevent a political institution from hitting the exact saddle-
trajectory. Nevertheless, the saddle-point property of optimal control trajectories has
found attention especially among Rational Expectations theorists because the existence
of a single optimal trajectory which converges to an equilibrium is compatible with the
concept of perfect foresight.
For a long time, the optimal control literature has concentrated on providing suffi-
cient conditions for the existence of saddle-point stability. However, the Hopf bifurcation
theorem can easily be used to demonstrate that the saddle-point instability is not the
only possible dynamical phenomenon in optimal control models.
Benhabib/Nishimura (1979) and Medio (1987a) have demonstrated that it is pos-
sible to establish (at least locally) the existence of closed orbits in models of optimal
economic growth. Consider the general optimal growth problem formulated by Ben-
habib/Nishimura (1979): 22

max {oo e-(o-n)U((T(y,k)))dt

Y Jo
(3.1.40)

s.t. k; = Yi - nk;, i = 1, ... , n.

22 Compare also Zhang (1988).

 3.1. Bifurcation in Continuous-Time Dynamical Systems 89

withy= (YI, ... , Yn) as the vector of per capita outputs y; in sector i, k = (ki, ... , kn) as
the vector of per capita stocks of capital, T(y, k) = cas the macroeconomic consumption
frontier, U( ·) as the utility derived from consumption, 6 as the discount rate, and n as
the rate of population growth.
The Hamiltonian function of problem (3.1.40) is

H(y, k, ~) = e-(o-n){U(T(y, k)) + ~(y- nk)}. (3.1.41)

By the maximum principle and the assumption of perfect competition, i.e.,

Be 8T
-=-=pj
8yj 8yj
(3.1.42)
Be 8T
-=-=Wj
8kj 8kj

with Yi E y, ki E k and Pi E p and Wj E w as the product prices and rental prices of

good j, respectively, it follows that

ki = Yi- nki
k
>.1 = -U 'wi
0

+ 6>.1 (3.1.43)
>.i = Uk'Pi
or
kj = Yj(k, p)- nki
(3.1.44)
Pi = -wi(k, p) + 6pi
if U' = 1. 23 The Jacobian matrix of (3.1.44) is

J = ((8y/8k)- nl (8y/8p) )
(3.1.45)
-(8w/8k) -(8w/8p)+6l '

which, under some additional assumptions on the technology set and competition, can
be written as
(8y/8p) ) '
J= (3.1.46)
-Bk' + 61
with B and I as C x C - matrixes. As the Jacobian (3.1.46) is quasi-triangular, the
characteristic roots are given by the roots of the matrixes B-nl and B' +61, respectively.

23 Cf. Benhabib/Nishimura (1979), p. 424 for details.

90 Chapter 3

Assume that the determinants of both matrixes are positive, i.e., that the eigenvalues
are complex conjugate. If there is a value S = S0 such that the trace of one of the
matrixes is zero for S0 , i.e., that the roots are purely imaginary, and if the trace is
increasing for increasing S, a Hopf bifurcation occurs at S0 implying that closed orbits
arise in a neighborhood of the stationary state Yi = 'h = OVj.
Depending on the value of the bifurcation parameter S, it is thus possible that
the optimal control trajectory is oscillating. On a first glimpse, this appears to be
a theoretical curiosity. For example, it may be argued that the discount rate is one
of the parameters of the model which can be influenced relatively easily by political
institutions. A political institution which is aware of the possible oscillating behavior of
a control trajectory can circumvent this phenomenon by suitably choosing the discount
rate. However, in some practical cases it may not be possible to manipulate the discount
rate whose actual value is responsible for the oscillating behavior of the model. The
rate can be predetermined by a social consensus and institutional arrangements.
The usual argument in justifying governmental interventions into the market pro-
cesses points out that in some cases

• the market is not able to realize the predetermined welfare criteria, and that
• the economy, if left to itself, may be characterized by fluctuations which constitute
divergences from a monotonic time path.

If it is optimal for the instrumental tools of a political institution to behave in a basi-

cally oscillating manner according to the optimal program described above, this basic
paradigm of economic policy interventions is challenged. Suppose that an uncontrolled
economy does not fluctuate. Then it may happen that an economy starts oscillating
when the political institutions intervene in the economic process. In other words, the
optimality criterion of the institution requires that an economy characterized by mono-
tone, but unoptimal time paths starts to oscillate after the installation of the policy.
Fluctuations usually considered as non-optimal emerge as the result of an optimization
process. 24

24 Compare also Foley (1986) and the model outlined in Section 4.2.3.
 3.2. Local Bifurcations in Discrete-Time Dynamical Systems 91

3.2. Local Bifurcations in Discrete-Time Dynamical Systems

This section deals with discrete-time dynamical system which either emerge genuinely
in dynamical models with a discrete, finite time concept, or which can be interpreted
as Poincare maps25 of continuous-time dynamical systems. Consider a one-parameter,
discrete-time, one-dimensional map f: R x R--+ R: 26

Xt+t = f(xt,p), x E R, pER. (3.2.1)

Let x* be a fixed point of (3.2.1), i.e., x* = f(x*, p). As is well-known, the asymptotic
stability of the fixed point x* depends on whether the slope of f, evaluated at the fixed
point, lies within the unit circle, i.e., whether 18f(x*)/8xl = IAI < 1. Bifurcations, i.e.,
changes in the qualitative behavior of (3.2.1) with a changing number of fixed points
at the bifurcation point, can therefore occur only where the eigenvalue A takes on the
value +1 or -1.

3.2.1. Fold, Transcritical, Pitchfork, and Flip Bifurcations

The first three bifurcation types are essentially equivalent to their analogues in continu-
ous-time dynamical systems. They are therefore only briefly mentioned in the following.

Fold, Transcritical, and Pitchfork Bifurcations

Consider first the case with A = + 1. The possible bifurcation types are summarized
in Table 3.2. While the transversality conditions for the different bifurcation types are
the same for continuous-time and discrete-time dynamical systems, the conditions on
the eigenvalues at the bifurcation points must be changed, i.e., the requirement A = 0
must be replaced by A = +1. In the graphical presentations of the different types
of bifurcation, the phase portraits have to be replaced by the appropriate graphs of
the mappings. The intersections of the graphs f(x, p) with the 45° line represent the
fixed points of the mappings. Figure 3.15 shows the graph of the prototype mapping
Xt+t = p- x~ for the fold bifurcation and different values of p.

It is easily possible to modify the economic examples provided in Section 3.1.1 in

order to meet the requirements of the appropriately modified theorems for discrete-time
systems.

25 C£ Section 4.2.1 for details.

26 The following presentation is to a large degree stimulated by the survey in Whitley
(1983).
92 Chapter 3

0 x•

......
........
·.·,
.. Jlz ....._
-----
The Fold Bifurcation in a One-Dimensional Mapping
Figure 3.15

Flip Bifurcation

A bifurcation type which is unique to discrete-time dynamical systems is the flip bifur-
cation. Assume that a fixed point x* exists, i.e., f(x*, J.Lo) = x*, and that its eigenvalue
is equal to -1.

Theorem 3.5 (Flip Bifurcation )27

Let fll : R-+ R be a one-parameter family of mappings such that fllo has a
fixed point x* with eigenvalue -1. If, at ( x*, J.Lo ),

(1) ( {}f [)2 f +2 [)2 f ) ~ 0

OJ.L 8x2 OXOJ.L

(2) -2(~~)- 3(~:;y =a~ 0,

then, depending on the signs of the expressions in (1) and (2),

< J.Lo (J.L > J.Lo), and

i) the fixed point x* is stable (unstable) for J.L
ii) the fixed point x* becomes unstable (stable) for J.L > J.Lo (J.L < J.Lo), and,
additionally, a branch of stable (unstable) fixed points of order 2 emerges
which enclose x*.

A fixed point of order 2 is a fixed point of the iterative of (3.2.1), i.e., of the mapping

(3.2.2)

27 Cf. Whitley (1983)

 3.2. Local Bifurcations in Discrete- Time Dynamical Systems 93

Denote the second iterative of the mapping as f of = J< 2 ). A fixed point of order 2 is
therefore a fixed point of the mapping j< 2 >, i.e., x* = j< 2>(x*).
For obvious reasons the flip bifurcation is often also called a period-doubling bi-
furcation. If the sign of the expression in (2) is negative, the emerging fixed points of
order 2 are stable, i.e., Xt permanently switches between two values x~ and x;. In that
case, the bifurcation is called a 8Upercritical flip bifurcation. The prototype equation
of the flip bifurcation is xt+ 1 = fLXt - px; (cf. Figure 3.16 with a < 0). 28 Note that
though the bifurcation diagram looks similar to that of the pitchfork bifurcation, both
are essentially different. In the pitchfork bifurcation two separate additional fixed points
(of order 1) emerge, while in the case of the flip bifurcation two components of a fixed
point of order 2 emerge.

xt+l x*

~----------------------~ p
Po

The Supercritical Flip Bifurcation

Figure 3.16

If a > 0 in Theorem 3.5, the fixed point x* is stable and the emerging fixed point
of order 2 is unstable. In that case, the bifurcation is said to be a 8ubcritical flip
bifurcation.
Consider the following very simple economic example from population economics. 29
In nearly all economic models in which the population size changes over time it is

28 The sign of (2) in Theorem 3.5 can be related to the Schwarzian derivative which
will be introduced in Chapter 4: if a < 0, then the Schwarzian derivative is also
negative.
29 For the following model, compare West (1985), pp. 150ff.
94 Chapter 3

assumed that the population growth rate is constant, i.e., 30

(3.2.3)

with Nt as the population size in period t. This assumption, which is usually assigned
to Malthus (1798), implies that a positive growth rate n leads to a permanent and
unbounded increase in the population. 31
The assumption of unrestricted population growth was criticized relatively early. 32
Empirical reasoning suggests that the population growth rate may instead depend on
the population level such that the rate decreases when the population level increases.
For simplicity, assume that a linear relation exists between the growth factor 1 + n and
the population level, i.e.,

1+n=Jl(1-Nt/M), JL>O, M>O, Nt:SMVt. (3.2.4)

The constant M serves as a saturation level of the population: if the population in-
creases, the growth factor decreases and eventually approaches 1, i.e., the growth rate
n is zero. If the population is equal to the level M, the growth factor n + 1 is equal to
zero, i.e., the growth rate n reaches its lower bound of -100%.
Substitution for n in (3.2.3) yields

(3.2.5)

or
(3.2.6)

The growth factor (3.2.4) and the mapping (3.2.6) are illustrated in Figure 3.17. Obvi-
ously, the coefficient Jl in (3.2.6) stretches the graph vertically. Denote the right-hand
side of (3.2.6) as f(Nt, Jl). 33 Let Jlo be the value of Jl such that there is a fixed point of the
mapping, i.e., N* = f(N*,Jl), with an eigenvalue A= 8f(N*,Jlo)/8N = JL-2JLN/M =
-1. Simple calculation shows that the conditions (1) and (2) of Theorem 3.5 are fulfilled,
namely

30 The continuous-time analogue is, of course, N/N = n.

31 In fact, this assumption is of course responsible for the optimistic attitude in the
basic neoclassical growth model without technical progress because in case of n = 0
no economic growth would occur at all.
32 Cf. West (1985), p. 101. for Verhulst's critique of Malthus' assumption.
33 The variable M is assumed to be constant.
 3.2. Local Bifurcations in Discrete-Time Dynamical Systems 95

l+n N t+l

J1

N OL-------------l.M___.. N t

3.17.a: The Growth Factor 3.17.b: The Mapping (3.2.6)

Population Growth Depending on the Population Level
Figure 3.17

( of a2 f + 2
Of-l ax 2
.!:.1_) =
OXOf-l
(N _ N 2 )
M
( - 2r)
M
+2 ( 1 - 2N)
M
(1)
-6- 2r 2
41-l < ovr > o

(2) -2 -( ()3ax1) - 3 (()2-ax1)2 = -2(0) -

3 2
( 2
3 _ _!!_
M
)2 < 0
Thus, by increasing f-l at f-lo, a flip bifurcation occurs. Instead of the monotone
population growth under the Malthusian assumption, the time path of Xt is now char-
acterized by a permanent period-2 cycle in the population level. From an empirical
point of view, this may be considered as artificial as the former hypothesis. However, it
will be demonstrated in Chapter 4 that there may be a sequence of flip bifurcations such
that the time path of Xt can eventually be described as irregular. 34 The flip bifurcation
can therefore be viewed as a transition to more complex dynamical phenomena.

Summary

The different bifurcation types with the appropriate transversality condition and the
prototype equations are summarized in Table 3.2 for the case n = 1.

34 Note that in the above model there may occur different types of bifurcation as well.
For example, a transcritical bifurcation occurs at the origin for low values of f-l·
96 Chapter 3

A Transversality Cond. Prototype Eq.

Fold A=1 8f/8J.L-::f0; Xt+t = J.L- xi

Bifurcation 8 2 f/8x 2 -::f 0

Transcritical A=1 8 2 f /(8J.L8x) -::f 0; Xt+l = J.LX- xi

Bifurcation 8 2 f /8x 2 -::f 0

Pitchfork A=1 8 2 f/(8J.L8x) -::f 0 Xt+l = J.LX- xt

Bifurcation 8 3 f/8x 3 -::f 0

Flip A= -1 (8f /8J.L)(8 2 f f8x 2 )+ Xt+l = J.LX- J.LXi

Bifurcation +2(82 f /(8x8J.L)) -::f 0
-2(~ f /8x 3 ) -
-3(82 /8x 2 ) 2 -::f 0

Bifurcation Types in Discrete-Time Dynamical Systems

Table 3.2

3.2.2. The Hopf Bifurcation in Discrete-Time Dynamical Systems

Most dynamic microeconomic models with optimizing behavior of individuals are for-
mulated in discrete time. On the contrary, most mathematical statements on closed
orbits in dynamical systems refer to continuous-time systems. An exception to this rule
is the Hopf bifurcation theorem for mappings in R 2 • Unfortunately, a generalization of
the theorem to n-dimensional systems does not exist.
The following result is essentially due to Ruelle/Takens (1971 ): 35

Theorem 3.6 (Hopf bifurcation - Existence Part)

Let the mapping Xt+l = F(xt,J.L), Xt E R 2 , J.L E R, have a smooth

family of fixed points x* (J.L) at which the eigenvalues are complex
conjugate. If there is a J.Lo such that

modA(J.Lo)=1 but An(J.Lo)-::f±1, n=1,2,3,4

35 The following is a truncated version of Iooss (1979) and Guckenheimer/Holmes

(1983).
 3.2. Local Bifurcations in Discrete- Time Dynamical Systems 97

and
d (mod .X(ft))
d 1-' > 0,
then there is an invariant closed curve bifurcating from 1-' = flo.

A comparison of Theorem 3.6 with Theorem 3.4 uncovers the analogy of this theorem
with the Hop£ bifurcation theorem for the continuous-time case. The requirement that
the eigenvalues cross the imaginary axis is replaced by the condition that the complex
conjugate eigenvalues cross the unit cycle, i.e., that mod .X = 1 at the bifurcation point
1-' = fLO· Furthermore, it is required that the roots do not become real when they are
iterated on the unit cirle: the first four iterations _xn must also be complex conjugate.
Finally, the eigenvalues must cross the unit cycle with nonzero speed for varying 1-' at
/-lO·
Theorem 3.6 establishes only the existence of closed orbits in systems that undergo
a Hop£ bifurcation. The stability of the orbits can be demonstrated in a way similar to
the procedure described for continuous-time systems. 36
The value of the modulus can be determined by the following simple consideration.
The characteristic equation is:
(3.2.7)
with the solution
At,2 = -a/2 ± Ja 2 /4- b. (3.2.8)
In the case of complex roots, (3.2.8) can be written as .X 1 ,2 =fit ± f32 i with {31 = -a/2
and {32 = Jb- a 2 /4. The modulus is defined as

mod(.X) = J{3~ + f3i

It follows that the modulus equals the square root of the determinant b:

mod( .X)= Ja /4 + b-
2 a2 /4 = ..fb. (3.2.9)

As a pedagogical example, consider once again the Kaldor model. Replacing the differ-
ential operator d/dt in (2.2.2) by finite differences yields

6.Yi+t = Yi+t - Yi = a(I(Yi, Kt)- S(Yi, Kt))

(3.2.10)
6.Kt+t = Kt+t - Kt = I(Yi, Kt)- 8Kt
or
Yi+t = a(I(Yi,Kt)- S(Yi,Kt)) + Yi
(3.2.11)
Kt+t = I(Yi, Kt) + (1 - 8)Kt.
36 See Guckenheimer/Holmes (1983), pp. 162-165 for details on stability proofs.
98 Chapter 3

The Jacobian matrix of (3.2.11) is

(3.2.12)

and
(3.2.13)
The eigenvalues are complex conjugate if

d et J (tr J) 2
> --
4 -. (3.2.14)

Assume that the inequality holds. A Hopf bifurcation occurs at a = ao if det Jla=ao
= 1:
(a(ly- Sy) + 1)(IK + 1- 15)- a[y(IK- SK) = 1
15- IK
(3.2.15)

Note that it is not assured that the bifurcation value a 0 is economically reasonable
because the denominator can be positive. In that case the calculated bifurcation value
would be negative.
The modulus crosses the unit circle with nonzero speed when the parameter a is
changed:

d 1-X(a)l d(JdetJ)
da la=<>o da

= 1/2((a([y- Sy) + 1)(IK + 1- 15)- aly(IK- SK)) - l / 2 (3.2.16)

((ly- Sy )(IK + 1- 15)- [y(IK- SK ))
15- IK
=-->0.
2ao

Provided that the iterates An, n = 1, ... , 4, on the unit circle remain complex conjugate
roots, the requirements of Theorem 3.6 are fulfilled, and a Hopf bifurcation occurs when
a = a 0 • Without inspecting the sign of a specific expression containing third-order
derivatives of the nonlinear parts in (3.2.11 ), nothing can be said about the stability of
the bifurcated closed orbit.
Recently, the Hopf bifurcation theorem for discrete-time systems has been applied
to several economic models. For example, Cugno/Montrucchio (1984) studied a discrete
version of Goodwin's predator-prey model, augmented by a mark-up pricing relation.
 3.2. Local Bifurcations in Discrete-Time Dynamical Systems 99

An overlapping-generations model with production can be found in Reichlin (1986), who

also provides stability conditions. Governmental policy in an overlapping-generations
model is studied by Farmer (1986).
Discrete-time systems behave in a significantly different manner than continuous-
time systems. The two economically equivalent versions of the Kaldor model generate
closed orbits for different values of the bifurcation parameter. Substitution of differential
operators by finite differences can lead to an at least quantitatively different behavior.
It is therefore important to remember that in practical applications the numerically
calculated bifurcation values are valid only for the assumed specific time concept.
Chapter 4
Chaotic Dynamics

The presentation of nonlinear dynamical systems in the preceding two chapters un-
covered a variety of mathematical concepts which allow one to establish endogenous
oscillations in economic applications. In these models, cyclical behavior can prevail for
large ranges of the parameters while persistent oscillations in linear dynamical systems
usually occur only for a particular parameter constellation. It seems natural, therefore,
to refer to nonlinear approaches when cyclical motion is to be modelled in economics.
In other words, cyclical behavior is synonymous with the presence of nonlinearities in
most cases.
Even so, the recent interest in nonlinear dynamical systems cannot be attributed
simply to the possibility for easily generating cyclical patterns like limit cycles. Nonlin-
ear dynamical systems can exhibit a behavior of the variables that strongly resembles
a random process. This means that the generated time series look erratic and that it
is not possible to predict the future development of the variables with precision. Even
if a model is completely deterministic with respect to the specification of the structure
and initial values, a pair of initial values located arbitrarily close together may lead
to completely different time series though they are generated by the same dynamical
system. This unexpected property of some nonlinear deterministic dynamical systems
is responsible for the label chaotic behavior or just chaos. While no single precise def-
inition of chaos exists, the kind of dynamical behavior present in chaotic systems is
 Chaotic Dynamics 101

exemplarily illustrated in Figure 4.1, which shows the diverging time series generated
by a simple one-dimensional difference equation for two slightly different initial values
of the state variable.

....
\
I l I \
I \
:I
'.j '' "'.)
I

' /\
I;' .\ I /. I
:\ : \ I \ \ I
'·I I:
·. \ I .. \
t. I
'"' i-<
\
:. \ :1:I r--..., .\ r v~ \• 'I
: \. ·i :'\ (·.
\ I \
\I \ / '....,
t
0
Stylized Chaotic Time Series
Figure 4.1

Chaotic behavior can emerge in very simple nonlinear dynamical systems. There-
fore the question arises of why this behavior has found attention in nearly all formally
oriented scientific disciplines only during the last two decades. In fact, many elements
of the modern theory of chaotic dynamical systems were known to such distinguished
mathematicians as H. Poincare at the turn of this century and P. Fatou and G. Julia
in the 1920s. It was the increasing usage of modern computing devices which enabled
a fast numerical generation of time series and their graphical presentations in systems
already known to possess unconventional behavioral patterns. On the other hand, the
numerical investigation of dynamical systems, which became popular in the late 1950s,
uncovered unexpected behavior in systems which had been studied for quite different
reasons. When E.N. Lorenz, who nowadays is usually cited as the initiator of the cur-
rent research in the field, began to experiment numerically with a fluid convection model
in the early 1960s, the discovered presence of a so-called strange attractor in a three-
dimensional continuous-time system could not have been foreseen (and in fact was not
honored until the mid-1970s). In any case, the fascination that can arise in investiga-
tions of chaotic dynamical systems can only be understood once the actual emergence
of a strange attractor has been followed on a graphics terminal. 1

1 Any reader without programming experience but who has access to a microcom-
puter is strongly advised to examine the PHASER program by Kot;ak (1986). The
program allows the inspection of the behavior of all standard examples of dynam-
102 Chapter 4

It is obvious that randomlike behavior in deterministic nonlinear systems is at least

theoretically relevant to economics. Actual economic time series do not show the regular
and harmonic motion known in linear dynamical systems. Exogenously given random
influences are therefore assumed to being superimposed on regular motion for reasons
of a realistic description of actual series and/or the persistence of cycles in otherwise
damped oscillations. The chaos property of some nonlinear dynamical systems can
provide an alternative to this unsatisfactory resort to non-economic forces in descriptive
explanations of actual time series. In addition, the presence of chaotic motion can be
considered as an explanation why economic prognoses have been notoriously bad.
The aim of this chapter is to provide an overview of the emergence of chaotic
motion in dynamical economics. The presentation of the mathematical concepts neces-
sary for understanding these economic applications is thus limited, yet hopefully suffi-
cient. The relevant literature will be given as often as possible for readers interested in
more in-depth mathematics. 2 This chapter is organized as follows: chaotic motion in
discrete-time dynamical economics is introduced in the first section. A short overview
of continuous-time chaotic systems and some economic applications are contained in the
Section 4.2. Though several recently emerging methods and techniques used to describe
chaotic motion quantitatively and to distinguish random and deterministic noise are
immanently connected to the contents of the present chapter, the presentation of these
methods is postponed to the separate Chapter 5 for expository reasons.

ical systems in a simple and relatively fast way. A faster and more sophisticated
program is DYNAMICS, written and circulated by J.A. Yorke. Readers with
some experience in FORTRAN programming should inspect the DYNAMICAL
SYSTEMS SOFTWARE package which represents the state-of-the-art in nonlinear
systems software. A nice collection of graphical illustrations of the behavior of non-
linear dynamical systems can be found in the multivolume book by Abraham/Shaw
(1983).
2 In recent years several good introductions to chaotic dynamics have been published.
For example, discrete-time mathematical chaos is described in the books by Collet/
Eckmann (1981) and Devaney (1986). Good introductions to chaotic nonlinear
models can be found in Berge et al. (1986), where the mathematical concepts
are illustrated with many applications from the natural sciences, and in Schuster
(1984). Good survey articles are, e.g., Eckmann (1981) or Ott (1981). Thompson/
Stewart (1986) provide a mainly geometrically oriented overview of many relevant
mathematical aspects and concentrate on examples from engineering. Economically
motivated introductions to the definitional framework can be found in Baumolj
Benhabib (1989), Brock (1986), Chen (1988a), and Kelsey (1988).
 4.1.1. Basic Concepts 103

4.1. Chaos in Discrete-Time Dynamical Systems

Recent mathematical studies of one-dimensional, discrete-time, nonlinear systems 3 show

that even very simple systems can behave in a very complicated dynamical man-
ner. Though this complicated behavior can also occur in higher-dimensional, discrete-
time and continuous-time systems, there are three motivations for elaborating on one-
dimensional systems at greater length:

• The mathematical properties of one-dimensional dynamical systems seem to b-tl

sufficiently well understood as compared with higher-dimensional systems.
• Many phenomena typical for higher-dimensional, discrete-time and continuous-time
dynamical systems can be illustrated with one-dimensional maps.
• Most economic examples of complicated dynamical behavior are framed in one-
dimensional difference equations.

This section therefore outlines the mathematical properties of one-dimensional, discrete-

time maps and provides several economic examples from descriptive and optimal eco-
nomic growth theory. Complicated behavior in a two-dimensional, discrete-time busi-
ness cycle is outlined in Section 4.1.5.

4.1.1. Basic Concepts

This section is divided into two parts. The first part describes some simple phenomena
observable in a family of one-dimensional maps and attempts to familiarize the reader
with basic ideas of chaotic motion. This part concentrates on the geometrical aspects
of successive bifurcations. In a second part, an exact definition of chaos and several
theoretical results are presented.

A Heuristic Introduction to One-Dimensional Chaos

Consider the one-dimensional, discrete-time system

Xt+t = f(xt, f.l), Xt E R, f.l E R, (4.1.1)

with Xt as the state variable and f.l as a parameter. Assume that there are values a
and b such that f(a, ·) = f(b, ·) = 0, i.e., the graph off crosses the xraxis twice.

3 For introductions to the subject see Collet/Eckma.nn (1980), Grandmont (1988),

Preston (1983), Singer (1978), and Whitley (1983).
104 Chapter 4

FUrthermore, assume that there is a critical value Xc for which f'(xc) = 0 and f'(xt) >
( <)OVxt < (> )xc. A map with these properties is called a unimodal map. For example,
let ( 4.1.1) be the concave quadratic function

Xt+l = fLXt(1- Xt), Xt E [0, 1], fL E [0,4], (4.1.2)

which is the so-called logistic equation or Verhulst dynamics, already introduced in Sec-
tion 3.2.1. 4 This one-dimensional map is non-invertible, i.e., while Xt+l is unambigiously
given for a certain Xt, the inverse Xt = f- 1 (xt+d yields two values of Xt for a single
Xt+l· For p E [0,4], the interval [0, 1] of the state variable is mapped onto itself. The
graph of the function f(xt.p) = fLXt(1- xt) is stretched upwards when pis increased,
while the points of intersection with the Xt axis do not change ( cf. Figure 4.2).

The Logistic Equation for Different p

Figure 4.2

Provided that the parameter pis large enough, the map ( 4.1.2) possesses two non-
negative fixed points, i.e., x* = f( x*, p ), namely the origin, x* = 0, and

X
*= 1
1- -, fl > 1. (4.1.3)
ll

4 Irregular and seemingly stochastic motion bas been known to exist in this equation
for a long time. As early as in 1947, Ulam/v.Neumann (1947) mention the possi-
bility of using the logistic equation ( 4.1.2) with p = 4 as a quasi-random-number
generator on computers. The recent interest in the equation was stimulated by
May's (1976) famous article in Nature.
 4.1.1. Basic Concepts 105

If 0 < J.l < 1, there is a fixed point x* < 0 in addition to the origin. At J.l = 1, a
transcritical bifurcation occurs (cf. Section 3.2.1.), i.e., the origin changes its stability:
while the origin is stable for J.l < 1, it becomes unstable for J.l > 1. The second fixed
point turns from an unstable fixed point (x* < 0) into a stable fixed point (x* > 0).
As was demonstrated in Section 3.2.1., a non-invertible map like ( 4.2.2) undergoes
a flip bifurcation when J.l is sufficiently large: the fixed point x* (J.l) > 0 is stable as long
as the slope of f(xt, J.l) at x*(J.l) is absolutely smaller than 1. As the slope of the graph
increases everywhere (except at the critical point) when J.l is increased, there will be a
value of J.l such that the fixed point x*(J.l) becomes unstable (cf. Figure 4.3). The slope
of the graph of equation ( 4.2.2) is

df(xt) = J.J.(1- 2x*) = 2- J.l, (4.1.4)

dxt lx=x*

implying that a flip bifurcation occurs for J.l = 3. The formerly stable fixed point
becomes unstable and a new stable fixed point of period 2 emerges: the state variable
Xt switches permantly between the two components of the fixed point.

/
/
/
/
/
/
/
/

xt
4.3.a. stable 4.3.b. unstable
Loss of Stability in the Logistic Equation
Figure 4.3

The statement that the mapping ( 4.2.2) possesses a fixed point of period 2 can also
be expressed in an alternative formulation. Define the second iterative as

(4.1.5)
106 Chapter 4

For the logistic equation, j< 2)(xt,Jl-) reads

(4.1.6)
Two graphs of the map f( 2 ) for different values of Jl- are depicted in Figure 4.4. If Jl- is
small and a single non-trivial fixed point ( x*, Jl-) is stable, the graph of j< 2 ) can intersect
the 45° line only once for x* > 0 (cf. Figure 4.4.a) (a fixed point of the mapping f( Xt, Jl-)
is, of course, also a fixed point of the mapping J< 2 )(xt, JJ-) ). When Jl- is larger than its
bifurcation value for the flip bifurcation, the graph of J< 2 )(xt, JJ-) intersects the 45° line
three times for positive Xt, namely at the unstable fixed point of f(xt,Jl-) and at the
two components of the period-2 fixed point. A period-2 fixed point of the map f( Xt, Jl-)
is therefore a fixed point of the map J< 2 )(xt,Jl-), i.e., xi*= j< 2 )(xi*,JJ-); i = 1,2, when
the graph of j< 2 )(xt, JJ-) has more than one point of intersection with the 45° line.

X t+2

"" " "

"" ""
"
""
"
""
""
""
""
" "
"
""
" "" ""
"" "
"" " ""
0~--------------------~~
1 x t 0~--------------------~--~
1 xt
4.4.a. 4.4.b.
The Second Iterative of the Logistic Equation
Figure 4.4

A fixed point of the map f( 2 )(xt,Jl-) is stable as long as the slope of the graph,
evaluated at the fixed points, is absolutely smaller than one, i.e.,

ldf( 2 )(xt,Jl-)l < 1. (4.1.7)

dxt

The chain rule of differentiation implies that

(4.1.8)
 4.1.1. Basic Concepts 107

The unstable fixed point of the map f( x 1 , J-t) is therefore also an unstable fixed point of
the map f( 2 )(x 1 ,J-t) because x 1 = xt+ 1 and lf'f'l > 1 at that point. In the case of the
period-2 fixed point, i.e., xi*= f(xi*,J-t) and xi*= f(xi*,J-t); i = 1,2, (4.1.8) implies
f( 2 )' (xi*, J-t) = f' (xi*, J-t) · f' (xi*, J-t ), meaning that the derivative of f( 2 ) at a fixed point
is determined by the slopes of f along the cycle.
Differentiating the slope of f( 2 )( x 1 , J-t) with respect to J-t yields

df( 2 )'(x 1 ,J-t) _ d(f'(xt,J-t)f'(xt+1)) _ df'(xt,J-t)f'( ) + df'(xt+1,J-t)f'( )

dJ-t - dJ-t - dJ-t Xt+1,J-l dJ-t Xt,J-t.
(4.1.9)
Straightforward calculation shows that the derivative is negative. 5
When the slope of f( 2 )(x 1 ,J-t) decreases for increasing J-t, it will eventually be abso-
lutely larger than 1, implying that the pcriod-2 fixed point becomes unstable. In fact,
each branch of the period-2 cycle becomes unstable, and a new flip bifurcation occurs
at the appropriate J-t value. The two branches of the formerly stable period-2 cycle each
split into two new stable branches such that a period-4 cycle emerges. In addition, the
two formerly stable branches of the period-2 cycle persist as unstable fixed points of
order 2. Furthermore, the original branch of single fixed points of the map f is still
present as a branch of unstable fixed points.
This scenario of the emergence of a stable cycle with order 2n; n = 0, 1, ... , the
splitting of each branch into two new stable branches and an unstable fixed point, etc.,
persists for increasing J-t in an interval. Figure 4.5 shows a stylized bifurcation diagram
of this period doubling scenario. The interesting observation in this bifurcation diagram
consists of the fact that the sequence of bifurcation values J-t for which a period doubling
occurs converges to a cumulation point J-lc· Feigenbaum (1978) made the important
observation that in the logistic equation this sequence of period-doubling bifurcation
values follows the rule 6

lim (J-ln- J-ln- 1 ) = h ~ 4.6692 .... (4.1.10)

n-+oo J-ln+1 - J-ln
If two successive bifurcation values are known, the next bifurcation value can be cal-
culated from (4.1.10). 7 In this way, all bifurcation values of the logistic map can
be determined. It turns out that the limit point of the period-doubling sequence is
J-lc ~ 3.5699... . More important, it has been shown that h is a universal constant

5 Note that the fixed points depend on J-t. Thus, the derivatives (df'(xt+ 1,J-t))/(dJ-t)
have two components, one due to the changing fixed point, and one due to the
changing slope at all x 1 •
6 Cf. Collet/Eckmann (1980), p. 37.
7 For example, if the first two bifurcation values J-t 1 = 3. and Jl-2 = 3.449 are known,
applying (4.1.10) yields ((1 + h)Jl-2- Jl-1)/h = J-ta ~ 3.54.
108 Chapter 4

in that it is present in many one-dimensional non-invertible maps. In addition, other

universal constants can be derived from the logistic equation and can also be found in
similar equations. 8 It is this prototype character of the logistic equation which justifies
its usually long expositions in textbooks.

x*

Period Doubling in the Logistic Equation

Figure 4.5

For values of fl above the critical value flc, phenomena other than period doubling
can be observed. Figure 4.6 contains a numerical plot of the bifurcation diagram of the
logistic equation. 9 The majority of fl values has a large number of associated Xt values.
In addition to 2n cycles, fixed points with all even periods k can emerge for appropriate
fl values. Furthermore, when fl is sufficiently large, fixed points with odd periods occur.
Figure 4. 7 illustrates the emergence of a period-3 fixed point which will be of interest
in some theoretical results presented below. Most astonishing, there may be sequences
of Xt which do not possess any period at all.
While for many fl values in Figure 4.6 it is impossible to determine by visual
inspection whether the vertical xrvalues represent a stable cycle of order k, k large, or
aperiodic behavior, the diagram uncovers structure. The cloud of Xt values disappears

8 For example, let dn denote the distance between that element of a period-2n cycle
which is closest to the critical value Xc and the element of a period-2n-l cycle which
is closest to the critical value. Then the ratio dn/dn+l = -o: ~ -2.50 ... is another
universal constant.
9 Such a diagram is generated in the following way: fix a certain fl and an initial
value x 0 and calculate the sequence {xt}if, T large, and drop the first elements
such that transients do not appear in the diagram. Then repeat the procedure for
other equally spaced values of fl.
 4.1.1. Basic Concepts 109
X
1.25

1.00

0.75

0 .50

0 . 25

O.OO - t - - - - - . - - - - - . - - - , - - - , - - - - - , - - - - ;
2.8 3.0 3.2 3.4 3.1 3.8 4.0
a
Numerical Plot of the Bifurcation in the Logistic Equation
Source: Herrmann {1986), p. 114
Figure 4.6

for several intervals of p values, and low-order periodic cycles prevail. These regions of
fL values are called windows.

/
/ /
-- · - -/{ /
I / I // I
I / I / I
I / I
I
I / I I
1// ' I
- - ... --1 I I
// I I
// I
/ I I
/ / I / I
/ I I
I / I / I I
)! ____ ,. ____ _
I I
/
I I
/
L------------~~~ x t

4.7.a : Xt+l = f(xt,fl)

Period-3 Fixed Points in the Logistic Map
Figure 4.7

Without providing a precise definition at this place, the simultaneous presence of

periodic cycles of order k and of aperiodic cycles will synonymously be called det erm in-
istic chaos, deterministic noise, or complex behavior in the following. The parameter
110 Chapter 4

regime 1-'c < 1-' < 4 in the logistic equation is called the chaotic regime.
In Figure 4.6 the x values belonging to a given 1-' seem to be equally distributed
over an interval. This impression can be verified by the following experiment: calculate
a time series from a given deterministic law of motion, e.g., the logistic equation, with a
suffi<:ient number of elements, say 10,000 data points. Divide the admissable x interval,
i.e., [0, 1] in case of the logistic equation, into m subintervals of equal length. For
example, consider 20 subintervals, each of which is 1/20 of the total length of the
admissable x interval. Then, count the number of points in the calculated time series
falling into subinterval h, h = 1, ... , m. In the histogram in Figure 4.8, the number of
data points of a fictitious time series falling into each of the 20 subintervals is plotted
on the ordinate against the x values of the subintervals .

.s
•
...
.....

z
0
...
Q)
.0

5
• • • • • .. • •
•• • •• ••••.
0 1
A Histogram of a Fictitious Time Series
Figure 4.8

If a dynamical system possesses a stable fixed point, the data points will accumulate
in a certain interval. If transients are excluded from the time series (e.g., the first 200-
500 data points of the time series), the histogram will display only one point in a single
interval. If the system possesses a stable orbit of a low order (say, e.g., of order 4),
the histogram will exhibit a finite number of nonzero ordinate values in the different
subintervals. Finally, if a time series is chaotic and no stable orbit exists, each interval
will he visited by the time series with a more or less equal probability. Figure 4.9 is a
histogram of the equation xt+ 1 = 1 - ax~ for 50,000 data points. 10 The admissable x
range is divided into 200 intervals. It can be seen that the connection of the ordinate
values in each interval seemingly forms a continuous curve. As no distinguished peaks
are observed in this curve, it can be concluded that the time series visits nearly every

10 The equation is qualitatively identical with the logistic equation.

 4.1.1. Basic Concepts 111

subinterval with the same probability, i.e., that the deterministic time series behaves
like a purely stochastic time series. 11

-1

A Histogram for xt+ 1 = 1- 2x;

Source: Collet/Eckmann (1980), p. 16
Figure 4.9

The dynamical behavior depicted in the histograms above is called ergodic behavior.
Roughly speaking, a system is said to exhibit ergodic behavior if the majority of initial
points visit every region in phase space with about equal probability_12 Figure 4.10
demonstrates this behavior in the familiar (xt,Xt+ 1 ) diagram: for sufficiently large p,,
the entire diagram will be filled by the trajectory when the number of iterations tends
toward infinity.
One-dimensional maps have become popular not only because of the ergodic char-
acter of some cycles, but because of a phenomenon which is indicated in Figure 4.1:
two initial points which are close together develop in a completely different way as time

11 Collet/Eckmann (1980), p. 16, demonstrate that the curve can be approximated

by the continuous density function

500

12 Cf. Sinai (1976) for more information on ergodic theory.

112 Chapter 4

p. =3 .8
I

/ , II II
II I

' ~n I
11 Ill I ll,;~
I
.,

~ 1/v J

vv
I

\
Ergodic Behavior in the Logistic Equation
Source: Thompson/Stewart (1986), p. 167
Figure 4.10

passes. The difference b etween the initial states may be arbitrarily small, but never-
theless the trajectories belonging to the two initial points may converge to cycles of
different period k or may behave aperiodically. When the difference between the initial
states is smaller than the precision of a calculator, it is impossible to precisely calculate
the sequence {xt} belonging to an initial value x 0 • This phenomenon is called JenJitive
dependence on initial conditionJ. When a dynamical system possesses this property, its
behavior is called mixing. Theoretically it may be difficult to est ablish whether or not a
map like (4.1.2) displays a mixing behavior. The next section provides an introduction
to some analytical methods that allow for establishing ergodic and mixing behavior.

Deterministic Chaos

Ergodicity Mixing
.u. .u.
Stochasticity Sensitive Dependence

Table 4.1

This section ends with a short description of a phenomenon which can be observed
 4.1.1. Basic Concepts 113

in several time series of one-dimensional maps. While the time series in Figure 4.1
are characterized by a sawtooth pattern, i.e., a permanent increase and decrease in
successive data points, some series occasionally seem to settle down to a stationary
value, but eventually show a sawtooth behavior once again. Figure 4.11 illustrates
this intermittent behavior with a map, the graph of which comes close to the 45° line
in a tangential way. When an initial point is mapped into that region, the sequence
{xt} will stay in the region for a while and will exhibit only minor changes from one
iteration to the other. In Figure 4.11 the series eventually converges to a period-2
cycle. Other constellations with {xt} displaying another long-run behavior can easily
be constructed. 13

r----------------------- -,,
. .I
I
---)4
, ,

..
I ,
1,'
;'
-Jf'
1,,

Intermittency in a One-Dimensional Map

Figure 4.11

Some Results for One-Dimensional Maps

The foregoing presentation has uncovered that the dynamical behavior of one-dimen-
sional maps can be rather complicated. This section provides a short overview of some
analytical results. The question of whether the dynamical behavior is sensitive to initial
conditions will be elaborated upon at some length.
It was mentioned above that the presence of a period-3 cycle is of particular im-
portance to complex behavior in one-dimensional maps. The following theorem of

13 Occasionally, the term intermittency is also used to describe the windows in a

bifurcation diagram: intervals of JJ values with associated clouds of Xt values are
superseded by intervals of JJ with low-order cyles in Xt.
114 Chapter 4

Sarkovskii provides an answer to why period-3 cycles play a dominant role for chaotic
dynamics: 14

Theorem 4.1 (Sarkovskii)

Consider the following ordering of all positive integers:

1 -< 2 -< 4 -< 8 -< 16 ... -< 2k -< 2k+ 1 -< ...

. . . -< 2k+ 1 (2n + 1)-< 2k+ 1 (2n- 1)-< ... -< 2k+ 1 5-< 2k+ 1 3-< ...
. . . -< 2k(2n + 1)-< 2k(2n -1)-< ... -< 2k5-< 2k3-< ...

. . . -< 2(2n + 1)-< 2(2n- 1)-< ... -< 2 · 5-< 2 · 3-< ...
. . . -< (2n + 1)-< (2n -1)-< ... -< 9-< 7-< 5-< 3.
Iff is a continuous map of an interval into itself with a period p and q -< p in
this ordering, then f has a periodic point of period q.

The odd integers starting with the number 3 have received the highest ranks in this
ordering, followed by the odd integer times 2, 22 , 23 , etc. This ranking covers all integer
numbers except the powers of 2. These last integers have received the lowest ranks.
Consider an arbitrary integer in this ordering. For example, if this number is 4, then
the theorem implies that a mapping with a periodic point of period 4 also has a periodic
point of period 2 and a periodic point of period 1 (i.e., a single stable equilibrium
point). 15 If this number is 12 (= 22 3), then all cycles of order 2k, (k = O, ... ,oo), and
cycles of order 20, 28, 36, 44, ... , of order 24, 40, 56, 72, ... , etc. exist As soon as a
period-three cycle has been detected, it follows that there are periodic points with every
possible period.
The Sarkovskii theorem can also be interpreted the other way round: for example,
if it can be shown that no period-2 cycles exist, then no higher-order periods exist as
well because the latter implied the existence of the former according to the Sarkovskii
theorem.
A related theorem is the famous Li/Yorke theorem: 16

14 Cf. Guckenheimer/Holm es (1983), p. 311.

15 Alternatively, a period-4 point does not necessarily imply the existence of a period-S
point, which is ranked higher in this ordering.
16 Cf. Li/Yorke (1975), p. 987.
 4.1.1. Basic Concepts 115

Theorem 4.2 (Li/Yorke)

Let J be an interval and let f :J -t J be continuous. Assume there is a point
a E J for which the points b = f( a), c = J< 2 )( a), and d = f( 3 )( a) satisfy

(or d 2: a > b > c)

then
i) for every k = 1, 2, ... there is a periodic point in J having period k.
Furthermore,
ii) there is an uncountable set S C J (containing no periodic points), which
satisfies the following conditions:
A. For every p, q E S with p -:f: q

lim sup I f(n)(p)- f(n)(q) I> 0,

n-+oo

and
liminf I f(n)(p)- f(n)(q) I= 0.
n-+oo

B. For every p E S and periodic point q E J,

lim sup I f(n)(p)- f(n)(q) I> 0.

n-+oo

Verbally, the statements of (ii A.) and (ii B.) of the theorem are:
• No matter how close two distinct aperiodic trajectories come to each other, they
must eventually move away from each other.
• Every possible aperiodic trajectory moves arbitrarily close to every other one.
• If an aperiodic cycle approximates a cycle of order k for a while, it must move away
from that cycle.
A one-dimensional map displaying the properties of i) and ii) of Theorem 4.2 will be
called a chaotic map in the Li/Yorke sense. If a map possesses a period-3 cycle, Theorem
4.2 implies the existence of Li/Yorke chaosP
If a one-dimensional map is chaotic in the Li/Yorke sense, the map possesses peri-
odic cycles of arbitrary order k as well as aperiodic cycles. It is very important to note

17 Subsequent results by Li et al. (1982) have extended the period-3 requirement to

the case of odd periods 2: 3.
116 Chapter 4

that this does not imply that the dynamic behavior is irregular for an arbitrary x 0 • The
Li/Yorke theorem or the Sarkovskii theorem only establish the existence of aperiodic
and unstable periodic cycles, but they do not say anything about the relative frequency
of their emergence or their observability. If a map possesses a stable periodic orbit, ini-
tial points in the basin of attraction of the cycle will be attracted to it. Consequently,
it may not be possible to encounter the sensitive dependence on initial conditions which
characterizes a mixing behavior. Chaotic maps in the Li/Yorke sense may therefore
allow the prediction of the future evolution when the map possesses a stable periodic
orbit.
As the interest of several disciplines, including economics, in the behavior of some
dynamical systems was initiated by the phenomenon of that sensitive dependence, it is
desirable to provide a definition of chaotic behavior which takes this dependence into
account. The following definition of chaotic behavior will be used in the rest of the
section: 18

Definition 4.1
Let J be a set. The map f :J --+ J is said to be chaotic on J if
1. f has sensitive dependence on initial conditions,
2. f is topologically transitive, and
3. periodic points are dense in J.

Property 1. can precisely be formulated by the following definition:

Definition 4.2
The map f : J --+ J has sensitive dependence on initial conditions if there
exists 6 > 0 such that, for any x E J and any neighborhood U of x, there
exists y E U and n ~ 0 such that lf(n)(x)- f(n)(y)i > 6.

In other words, two initial values x and y eventually diverge from each other. The
topological transitivity mentioned in item 2. of Definition 4.1 is essentially equivalent
to the ergodic character of a time series:

Definition 4.3
The map f : J --+ J is said to be topologically transitive if for any pair of open
sets U, V C J there exists n > 0 such that j(n)(U) n V =/:- 0,

18 For the following definitions see Devaney (1986), p. 49£.

 4.1.1. Basic Concepts 117

i.e., an initial point is mapped on every subinterval of J after a sufficient number of

iterations. Finally, the last property in Definition 4.1 means that periodicities dominate
the dynamical behavior of a chaotic map.
From a theoretical point of view it is thus particularly desirable to answer the
question of whether the dynamical behavior of a map possesses the sensitive dependence
on initial conditions.
In order to determine whether a discrete-time, one-dimensional map has one or
several stable orbits introducing the following notion is useful. 19

Definition 4.4 (Schwarzian derivative)

Consider a C 3 -continuous one-dimensional map

The derivative f 5 (xt) at a point x with f' f 0, defined as

is called the Schwarzian derivative of f.

The Schwarzian derivative preserves its sign under composition, i.e., if, for example,
f 5 (xt) < 0, then the derivative f(n)S(xt) of the nth iteration is negative as well. The
relevance of this Schwarzian derivative becomes obvious in the following theorem: 20

Theorem 4.3 (Singer (1978))

Consider the map xt+ 1 = f(xt) which maps a closed interval I= [0, b], b > 0,
onto itself. If
i) f is C 3 '
ii) f has one critical point c with f'(x) > 0 Vx < c, f'(c) = 0, and f'(x) <
OVx > c,
iii) f(O) = 0 and f'(O) > 1, i.e., the origin is a repelling fixed point.
iv) f 5 (xt)~OVxEl\{c}.
then f has at most one stable periodic orbit in the interval J.

If conditions i)-iv) hold true the map f is sometimes also called S-unimodal. 21 As an
19 Cf. Singer (1978) and ColletjEckmann (1980), Chapter II.4 and Preston (1983),
pp. 60/f. for details on the following ideas.
20 See also Nusse (1986).
21 Cf. Collet/Eckmann (1981), pp. 94£.
118 Chapter 4

example, consider the logistic equation (4.1.2). Obviously, f is c= and the origin is
a repelling fixed point. Furthermore, as f' = 11- - 2!1-Xt, f" = -211-, and f 111 = 0, the
Schwarzian derivative is negative for all x E [0, 1] except at the critical point Xc = 0.5.
Therefore, f has at most one stable orbit according to Theorem 4.3. 22
This does not mean that the map in question does indeed have a stable orbit. The
following theorem suggests a simple method for establishing the existence of a stable
periodic orbit: 23

Theorem 4.4

If a map f has a stable periodic orbit, then the critical point Xc will be attracted
to it.

Figures 4.12.a and 4.12.b show two examples of quadratic maps where the critical point
Xc is attracted by a stable orbit. In Figure 4.12.a, iterates of the critical point converge

to a period-2 cycle, while in Figure 4.12.b the critical point happens to be located in
a period-4 cycle. When the requirements of Theorem 4.3 are fulfilled and when the
critical point is mapped to the repelling origin, the map is sensitive to initial conditions.

/
/

......
/
/
/
;;(
/

4.12.a 4.12.b
Critical Points and Stable Periodic Orbits
Figure 4.12

If a map possesses a stable periodic orbit, the orbit of almost every initial point will
converge toward this stable orbit. Almost every has the meaning of Lebesgue measure

22 Cf. also Guckenheimer et al. (1977), pp. 140-142.

23 Cf. Collet/Eckmann (1981), p. 14.
 4.1.2. Chaos in Descriptive Growth Theory 119

zero, i.e., the exceptional initial points do not lie in a connected interval on the line.
Aperiodic points do exist, but they do not attract initial points.
The detection of a period-3 cycle therefore implies the existence of chaos in the
Li/Yorke sense, but not necessarily in the sense of Definition 4.1. Sensitive dependence
on initial conditions is a phenomenon which can be rather improbable in many maps.
These properties can be summarized in the following theorem: 24

Theorem 4.5

If a map f fulfills the requirements of Theorem 4.3 and if it has an asymptot-

ically stable period orbit of order k, then the set of initial points whose orbits
will not be attracted by the asymptotically stable period orbit has Lebesgue
measure zero. Consequently, almost every initial point is asymptotically peri-
odic with period k.

It must be stressed, however, that the discussion above was concerned with the purely
mathematical aspects of the presence of mixing behavior. If a stable periodic orbit of
order k exists to which almost every initial point converges, it may happen that the
convergence procedure cannot be observed because the period k is very long. Two
initial points may be close together and their orbits may eventually converge to each
other. However, in the transient period their behavior may be completely different, and
it may seem that a sensitive dependence on initial condition is involved. For practical
purposes, the theoretically deduced improbability of this sensitivity can therefore be of
minor interest when the period k is very high. 25

4.1.2. Chaos in Descriptive Growth Theory

This section presents the two probably simplest ways to model economies with complex
dynamical behavior. It will be shown that standard models in descriptive growth theory
can be reformulated such that their dynamic equations are similar to the unimodal maps
discussed in the preceding section.
As a pioneer in detecting chaotic dynamics in economic systems, Day (1982) re-
considered the standard neoclassical growth model. In discrete time and assuming that
the capital stock exists for exactly one period the model is expressed as

24 Cf. Guckenheimer (1979) and Nusse (1987). The following version is an abbrevia-
tion.
25 See also the discussion between Melese/Transue (1986) and Day (1986).
120 Chapter 4

Yi = Ct +It
It= Kt+l
St = Yi - Ct = syt; s>0 {4.1.11)
Yi = F(Kt, Lt)
Lt = {1 + n )t L 0 ; n >0
with the usual meaning of the symbols, n as the constant growth rate of the popula-
tion, and s as the constant marginal savings rate. The production function is linear--
homogeneous, implying that the model can be reduced to

Kt+l
£; = sF(Kt. Lt)f Lt
(4.1.12)
kt+1{1 + n) = sf(kt)

with kt = Kt/ Lt as the capital-labor ratio.

Under the usual convexity assumption, the map possesses two equilibria: a repelling
fixed point at the origin and an asymptotically stable, non-trivial fixed point k* which
solves k* = sf(k*)/(1 + n).
In contrast to the usual neoclassical assumption, let the production function have
the following form:

(4.1.13)

The term (m- kt)'Y reflects the influence of pollution on per-capita income generated
by increasing capital intensities. The constant term m constitutes a saturation level,
implying that per-capita production falls to zero when kt = m. Substituting for the
production function in (4.1.12) yields

k _ sBk~(m- kt)'Y
Hl- (1 + n) . (4.1.14)

Consider first a simplification and let f3 = 1 = m = 1. Equation (4.1.14) reduces to

k _ sBkt(1- kt)
Hl - (1 + n) . (4.1.15)

Let f.l = sB/(1 + n). Equation (4.1.15) is then formally identical with the logistic
equation (4.1.2), and all properties of (4.1.2) apply to (4.1.15) as well.
Consider next the general five-parameter equation (4.1.14). The graph of (4.1.14)
can be modified by variations in the parameters. For example, increasing the parameter
 4.1.2. Chaos in Descriptive Growth Theory 121

B stretches the graph upwards. B therefore plays essentially the same role as f.l in
(4.1.2). In order to apply the Li/Yorke theorem to (4.1.14), consider the following three
distinguished values of k. Let F be the critical point ofthe map (4.1.15), i.e., the value
of k that maximizes the capital intensity:

(4.1.16)

When B is sufficiently large, kc is lower than the fixed point k*. Next, let kb be the
result of the backward iteration kb = f- 1 ( kc). When kc < k*, kb will be smaller than
kc.

~+1 /
--;of
I /I
I / I
--·---}/ I
/: I

'
/ :
/ :
/ : I
I / : I
/ . I
I / ;
;/
. :. I
I
/ . .
I
/
/
.:
/ :
/ :
/ :

A Neoclassical Growth Model

Figure 4.13

Finally, let km denote the maximum attainable capital intensity, i.e., the inter-
section of the graph of (4.1.14) with the abscissa. Variations in B eventually imply
that the graph of (4.1.14) is stretched upwards such that km is the forward iteration of
kc: f(F) = sB/(1 + n)(kc).B(m- kc)' = km (cf. Figure 4.13). As km is mapped to
the origin, the following relations between the k values result:
122 Chapter 4

* J(km) < kb < J(kb) < J(kc)

* f3(kb) < kb < f(kb) < !2(kb).
Thus, the requirements of the Li/Yorke theorem are fulfilled. The map ( 4.1.14) is chaotic
in the Li/Yorke sense for appropriate values of the parameters. Furthermore, applying
Theorem 4.4 shows that for specific values of B there is no stable periodic orbit: in
Figure 4.13 the graph of the map is drawn such that the critical point is mapped into
the origin k = 0. As the origin is a repelling fixed point of the map, the map cannot
have a stable period orbit. In this case, the prerequisites of Theorem 4.5 are not met,
and initial points with a sensitive dependency may have positive Lebesgue measure. In
addition to the practical problems of predicting the future dynamical behavior in the
map (4.1.15), it cannot be excluded that predictions are also theoretically impossible.
When B is lower than the value assumed in Figure 4.13, Theorems 4.4 and 4.5
cannot be applied because the Schwarzian derivative is not unambiguously negative 26
and because the forward orbit of the critical point is not as simple as in Figure 4.13.
This neoclassical growth model (which now can be called the prototype model in
chaotic, discrete-time, dynamical economics) is a modification of the standard textbook
approach to growth theory, and a generalization of the results of the modification is,
of course, impossible. However, noninvertible maps can be shown to exist in basic
traditional models without any further assumptions as well. An example of this kind of
model was provided by Stutzer (1980).
Stutzer's model was one of the very first economic investigations of chaotic dy-
namics. In particular, Stutzer stressed the possibly fundamental differences between
continuous-time and discrete-time dynamical systems. Consider the growth cycle model
studied by Haavelmo (1956) with

K > 0, 0 <a< 1 (4.1.17)

as the production function with a fixed capital stock. 27 The growth rate of employment
is assumed to be
N=a - N
N (3 y, a, (3 > 0, (4.1.18)

26 For example, tedious calculation shows that the Schwarzian derivative is

3 2( mkt - kt2)-2(m- 2kt )-2(m 2

f s( kt ) = 4m 2 - 4mkt + 4kt2)
for the specific values 1 = 0.5 and (3 = 0.5.
27 The assumption of a fixed capital stock is, of course, an oversimplification, and it
is surely problematic to speak of a growth model in this context.
 4.1.2. Chaos in Descriptive Growth Theory 123

i.e., the growth rate increases when per-capita output (income) increases.
Combining ( 4.1.17) and ( 4.1.18) yields the first order nonlinear differential equation

(4.1.19)

Equation ( 4.1.19) can be interpreted as a special form of the so-called Bernoulli differ-
ential equation 28 , which fortunately can be solved explicitly. The stationary equilibrium
(the particular solution) reads
( 4.1.20)

and the general solution is 29

( K N(O)a-1 _ /l_)e<>(a-1)t + /}_) a~ 1

N(t) = ( a a . (4.1.21)
K

Equation ( 4.1.21) describes a monotonic convergence toward the equilibrium level N*

because the coefficient of the exponential term in the nominator represents the initial
deviations from equilibrium.
A common procedure in many numerical investigations of differential equations con-
sists in replacing the differential operator in (4.1.19) by finite differences. Substituting
Nt+1- N 1 for N in (4.1.19) yields

(4.1.22)

which, by means of the transformation

Nt = (
K(1 +a))
(3
1
1-a
Xt, (4.1.23)

can be written as
(4.1.24)

28 The general form of a Bernoulli differential equation is

x + g(t)x + f(t)xa = 0.

In eq. (4.1.19) g(t) and f(t) are constants.

29 The solution mentioned in Stutzer (1980) is slightly incorrect but does not alter
the qualitative results.
124 Chapter 4

As 0 <a< 1, the transformed difference equation (4.1.24) has qualitatively the same
structure as the logistic equation: it is a one-humped, noninvertible map Xt+l = f(xt)
defined on the unit interval with f(O) = f(1) = 0 and a critical value x~+I located to
the left or to the right of Xt = 0.5 depending on the parameter a. By increasing the
parameter a, the graph of (4.1.24) is stretched upwards. Equation (4.1.24) therefore
exhibits chaos in the Li/Yorke sense for appropriately chosen parameter values. 30 As
equation ( 4.1.23) is only a positive linear transformation, chaos can thus prevail in the
discrete-time version of the Haavelmo growth cycle model as well.
It has been shown that a standard continuous-time model may exhibit chaotic
dynamics without further (and maybe ad hoc) economically motivated modifications
when time derivatives are replaced by finite differences. This expands a result already
known from linear dynamical systems: for constant parameter values, the replacement
procedure always implies a different dynamical behavior in the differential and difference
equations. If the parameters are not properly adjusted (by taking account of possibly
involved stocks and flows), the replacement procedure can lead to an incorrect result
(as measured with respect to the original continuous-time model). If the equations are
nonlinear, a smooth monotonic behavior of the differential equation may be transformed
into erratic oscillations.

4.1.3. Chaos in Discrete-Time Models of Optimal Economic Growth

Some of the most interesting results on detecting chaotic trajectories in dynamical eco-
nomics have been achieved by investigating discrete versions of optimal control models.
As has already been demonstrated in Chapter 3, it may be theoretically optimal that a
control program implies cyclical trajectories. In the context of a discrete-time, compet-
itive two-sector model, Benhabib/Nishimura (1985) provided sufficient conditions for
the existence of period-2 cycles. While these results touch on the validity of the usual
welfare-oriented paradigm of a desirable dampening of fluctuations by means of policy
measures, it can be shown that an optimal economic control model may even involve
the emergence of chaotic behavior. If optimal control leads to chaotic dynamics, it will
not be observed in practice.

30 The Schwarzian derivative of (4.1.24), namely

is negative when the last term in parantheses is negative. This is always true when
Xt is not to close to 0. Theorem 4.3 and 4.4 can therefore be applied to (4.1.24).
 4.1.3. Chaos in Discrete-Time Models of Optimal Control 125

Boldrin/Montrucchio (1986) have demonstrated that arbitrary, discrete-time dy-

namical system can be the outcome of an optimal control program. 31 Given a specific
C 2 -differentiable map, it is possible to re-construct an optimal control problem that
implies the given map as an optimal policy function when the discount rates are small
enough. As this map may be unimodal, optimal control may lead to chaotic behav-
ior. In the following, a specific numerical example of the presence of chaotic motion in
optimal control will be outlined.
Consider a standard, two-sector, optimal-growth model with a single capital good
k1 and homogeneous labor £1 available in period t. Capital and labor serve as inputs
in the production of consumption goods c 1 in sector 1 and in the production of capital
goods in sector 2. Let k~ 1 ) and k?) denote the amounts of capital in sectors 1 and 2,
respectively, the sum of which must fulfill kF) + k~ 2 ) ::;; k1 . Equivalently, £~ 1 ) and t?),
£~ 1 ) + £~ 2 ) ::;; L, denote the amounts of labor in both sectors with L as the total labor
force.
Let c 1 = J< 1 )(k~l),£P)) be the production function in the consumption goods in-
dustry. The maximal production in the investment goods industry is determined by
kt+ 1 = f( 2 )(k~ 2 ),£~ 2 )), i.e., the output is only available in the next period. Both func-
tions J<l) and f( 2 ) are assumed to be continuous, monotonically increasing, and strictly
concave.
The optimal control problem can be formulated as follows:

t=O

s.t. c
t-
< f(1)(k(1) £(1))
t ' t
kt+ 1 ::;; !(2) ( k~2)' £~2)) ( 4.1.25)
£~1) + £~2) ::;; L
k(t 1 ) + k(t 2 ) < kt
-

ko = k

with f3 > 0 as the discount factor and u( c 1 ) as a standard, strictly concave utility
function.
The optimization problem ( 4.1.25) is equivalent to the problem
00

max
k, 2:
t=O
{3 1V(k 1 , kt+1)
( 4.1.26)
s.t. (kt, kt+1) ED
ko = k,

31 Cf. Montrucchio (1988) for an extension to the continuous-time case.

126 Chapter 4

with D as the admissable set and V as the consumption frontier. The assumptions
concerning j(l), f( 2 ), and u imply that

The maximum possible consumption in each period depends on the existing capital
stock inherited from the last period and on the decision to produce capital goods in
the current period. For a given capital stock, a high output in the investment goods
industry implies a low output in the consumption goods industry, i.e., there is a trade-off
between the production of consumption goods and capital goods in each period. Figure
4.14 illustrates the consumption frontiers for different values of the inherited capital
stock from the previous period.

Consumption Frontiers for Different Values of kt

Figure 4.14

An optimal control problem like ( 4.1.25) can be investigated by dynamic program-

ming techniques. 32 The value function W,a(kt) for a given (3 is defined as

I: (3tV(kt, kt+
00

W,a(ko) =max 1)
t=O ( 4.1.27)

The value function W(·) satiesfies Bellman's equation, i.e.,

( 4.1.28)

32 Cf. Bellman (1957) or Blackwell (1962) for introductions to the subject.

 4.1.3. Chaos in Discrete-Time Models of Optimal Control 127

which allows the construction of a so-called policy function kt+ 1 = h;3( kt), determining
kt+ 1 as a function of its predecessor kt.
It has been known for a long time 33 that the policy function kt+ 1 = h;3(kt) pos-
sesses a stable fixed point for high values of (3. Furthermore, for very small discount
rates, h13(kt) = 0 for all admissable kt, i.e., the capital stock is entirely engaged in the
/3
production of consumption goods. However, there exist and/}_ such that for f3 E (/}_, /3),
the map h13 may exhibit complex dynamics for some V.
As a numerical example consider the following particular form of V(kt, kt+l) which
was studied by Deneckere/Pelikan (1986)

(4.1.29)

Equation ( 4.1.27) fulfills the concavity requirements mentioned above for a given nu-
merical value of the endowment of labor, L, and the associated maximal production of
capital goods.
For the particular choice of f3 = 0.01, the value function W(kt) of this example is
W(kt) = 100/3 kt- 5ki such that Bellman's equation reads

W(kt) =max { V(kt, kt+!) + 0.01 ( -100 2 }

3 kt- 5kt) . (4.1.30)
kt+l

Setting the partial derivative of the r.h.s. of ( 4.1.30) with respect to kt+ 1 equal to zero
and solving for kt+ 1 yields the desired policy function 34

kt+l = h(kt)
(4.1.31)
= 4kt(1 - kt).

As (4.1.29) is identical with the logistic map (4.1.2) of Section 4.1.2 with J..L = 4, the
policy function of this optimal growth problem implies chaos in the sense of Li/Yorke.
Furthermore, the map is sensitive to initial conditions. 35
As was mentioned above, the presence of chaotic dynamics in optimal control mod-
els implies that the associated policies cannot be observed in practice. When the choice
of the appropriate capital stock in the next period depends on the infinitely precise

33 Cf. Brock/Scheinkman (1978) and McKenzie (1986).

34 Substituting (4.1.31) for kt+l in (4.1.30) verifies that W(kt) = 100/3 kt- 5ki is
indeed the value function of the problem.
35 Replacing the term 100/3 kt in (4.1.29) by 1/(3(3) kt yields more general policy
functions revealing the dependency on the discount rate.
128 Chapter 4

numerical value of the current capital stock, it will not be possible for a central planner
to determine the optimal policy. Even if the next period's capital stock is calculated
with a relatively high accuracy depending on the measuring devices, repeated applica-
tion of imprecise measurements ultimately causes the calculated time path to diverge
drastically from the theoretically ideal and optimal growth path.
In addition, even if a central planner succeeds in keeping the actual growth path
close to its theoretical and optimal ideal, the policy measures may be abandoned be-
cause the path looks too erratic. When a growth path without any control is monotonic
but unoptimal, an irregular but actually optimal growth path may inspire reflections
on the correctness of the planner's underlying model because complex motion is incom-
mensurable with a linear worldview.

4.1.4. Other Economic Examples

The examples of chaotic dynamical models outlined above constitute only a small subset
of the available literature, and reviewing all interesting approaches to irregular dynamics
is impossible. In the following, a short list of economic applications of the mathematical
results on nonlinear, one-dimensional maps will be presented. Naturally, the list does
not claim to be complete.
A paper by Benhabib/Day (1981) should be viewed as the first major investigation
of chaotic behavior in dynamical economics. The authors demonstrated that rational
choice in a standard micro-framework can involve erratic behavior when preferences
depend on past experience (see also Benhabib/Day (1980)). Pohjola (1981) studied a
discrete version of Goodwin's growth cycle model ( cf. Section 2.4.2). Gabisch (1984)
elaborated upon a multiplier-accelerator model of the Samuelson-Hicks type, where only
slight nonlinearities are involved, and Gaertner (1986, 1987) studied cyclical consump-
tion patterns. Ploeg (1986) investigated complex dynamics in a financial markets model
developed by Begg (1983). Chiarella (1986) demonstrated the emergence of irregular
dynamics in the well-known microeconomic cobweb model of sluggish supply adjust-
ment.
The paper by Day/Shafer (1986) constitutes a major step in establishing chaotic
dynamics as a serious phenomenon in dynamical economics. Consider a standard IS-
LM framework. If the investment function has some slightly unusual properties, the
dynamical behavior is characterized by complex behavior. It is particularly important
that, since the IS-LM setup is traditionally used to motivate governmental activities
to intervene in the economy, a government may fail to determine the correct degree of
intervention and the precise timing of the activities.
It seems as if the economics profession really became aware of the possible rele-
vance of chaotic dynamics after the publication of Grandmont's (1985) paper on cyclical
 4.1.5. Chaos in Higher-Dimensional Discrete-Time Systems 129

behavior in a general equilibrium framework. While general equilibrium theory (or com-
petitive equilibrium theory) concentrated for a long time on the existence and (asymp-
totic) stability of a (hopefully) unique equilibrium, Grandmont showed that it is possible
to encounter complex dynamics in an intertemporal, overlapping-generations model (cf.
also Benhabib/Day (1982)). The key to the model is the presence of a negative in-
come effect leading to a backward-bending offer curve. Even if individuals have perfect
foresight, the economy may, in retrospect, be characterized by complex behavior. 36
Woodford (1987, 1989) studied the effects of imperfect financial intermediation between
workers and entrepreneurs in an intertemporal optimization problem.
Traditional textbooks on the economics of location present typical patterns of the
spatial organization of villages, cities, or industrial and commercial locations. At least
with respect to non-American urban areas, these regular patterns often constitute a
sharp contrast to the observable and historically given spatial organizations. Aside
from such major influences as political, social, and (of course, most importantly) ge-
ographical ones, it is tempting to apply recent techniques in nonlinear dynamics also
to the economics of spatial organization. In fact, recent research on spatial chaos has
demonstrated that it is possible to explain some irregularities in the spatial organization
of economic units with the help of nonlinear dynamics. For example, Dendrinos (1985)
delivered a framework for the modelling of irregular urban decline. Papers by White
(1985) and Nijkamp (1987) uncover that chaotic dynamics may be a typical phenomenon
in models dealing with spatial evolution.

4.1.5. Chaos in Higher-Dimensional Discrete-Time Systems

One-dimensional, discrete-time dynamical systems in economics are surely suited for

demonstrating the relative ease with which complex behavior can be modelled. However,
there are several objections to the use of one-dimensional maps in dynamical economics.

• Most economic phenomena are originally framed in higher-dimensional dynamical

systems. The methods presented above can only be applied when the genuine model
is extremely simplified.
• In many cases, ad hoc assumptions are necessary to justify the presence of unimodal
maps because these maps do not seem to be generic in standard economic theory.
• One-dimensional maps typically display a sawtooth pattern in the generated time
series. Other interesting phenomena like smooth but irregular time paths cannot
be observed in these maps.

36 A concise introduction to complex behavior in overlapping-generations models can

be found in Kelsey (1988).
130 Chapter 4

This section provides a short introduction to complex behavior in higher-dimensional

maps. The emphasis will be on two-dimensional systems because results for n-dimen-
sional systems seem to be vague or unpractical.
The following equation will serve as the prototype equation of complex behavior in
R2:
Xt+1 = f(xt) + Yt (4.1.32)
Yt+t = f3xt,
with f(xt) as a noninvertible map. 37 When f3 = 0, equation (4.1.32) is identical with the
one-dimensional map (4.1.1). When f3 =/:- 0, (4.1.32) is invertible, i.e., it can explicitly
be solved for Xt and Yt, namely Xt = Yt+t/ /3 and Yt = Xt+t - f(Yt+t/ {3). Such a
two-dimensional map is called a diffeomorphism. 38
Before some mathematical results on chaotic dynamics in two-dimensional, dis-
crete-time systems will be presented, consider the following numerical simulation of a
very simple economic example demonstrating the geometric complexity of the dynamic
behavior. If the continuous adjustments Y and k in the familiar Kaldor model of
Section 2.2.2 are replaced by the finite differences 6Yi+t and 6Kt+ 1, the model turns
into39
6Yi+t = Yi+t- yt = a(It(Yi,Kt)- St(Yi))
(4.1.33)
6Kt+t = Kt+t - Kt = lt(Yi, Kt)- 6Kt
with the same meaning of the symbols as before. When the investment function is of the
Kaldorian S-shape type40 , the time series converges to the unique stationary equilibrium
for low values of the parameter a. When a is increased, the sequence (Yi, Kt) is first
located on an attracting closed orbit. For values of a larger than a critical ac, a sequence
of 1000 points in the (Yi- Kt) plane generates the cloud depicted in Figure 4.15.
The single points (Yi, Kt) jump irregularly in this graphical object, and the struc-
ture becomes apparent only after a larger number of iterations. The object forms an
attractor, i.e., initial points located far away from the object approach it very rapidly.
The unusual form of the attractor which is neither a single point nor a closed orbit is
the reason why it is called it a strange attractor 41 The separate plotting of the time

37 Cf. Ott (1981), p. 659. When f(xt) = 1 - f'XL the map is known as the Henon
map.
38 Cf. Devaney (1986), p. 9 for a precise definition. Compare also Section 4.2.4.
39 A numerical simulation of basically the same model but with another numerically
specified investment function can be found in Dana/Malgrange (1984).
40 The investment function used in the simulation is It = c2-t/[(dYi+-<) 2 ] + eyt +
a(f / Kt)g with a, c, d, e, J, g, and c; as parameters. The parameter values can be
found in the legends of the plot.
41 Cf. Section 4.2 for details on the notion of a strange attractor.
 4.1.5. Chaos in Higher-Dimensional, Discrete-Time Systems 131

The Kaldor-Model
.....
-··
UI.O

UI.O

ZkO
&Ia. I

Ul.l

1?8.1

.,...
17&0

w ,...
nt-1

..............
au.o

.....
aM. I

aM. I

~·
~
... u.o .... ... .... ..... y
J..U. I 140.0 1.11.0

= 11:11 21$.00
'""' :1.00 20.00
Cl :

c= 20.000 d:; 0.0$0 Y11 = 1~00

4= 0.0100 e = 0.00001
•= 0.0:100 • = 0.21 l:u =2111.00
t :: 260.00 Yp =111.00
•= '-:SO II.:; 1000

Chaos in a Discrete-Time Kaldor Model

Figure 4.15

series Yi and Kt versus time shows the irregularity as well as the sensitive dependence
on initial conditions more clearly. In Figure 4.16 the time series of Yi and of Kt are
shown for slightly different initial values. After wandering together for a short time
interval, the two time series diverge drastically.
A theoretical result for the dynamics of n-dimensional maps comparable to the
Li/Yorke theorem was provided by Phil Diamond in 1976. By replacing the iterative of
a one-to-one function by the iterative of a set, Diamond formulated conditions for the
existence of a scrambled set qualitatively equivalent to the Li/Yorke conditions. Early
applications of the Diamond theorem in economics have turned out to be problematic
and will not be discussed further. Instead, the rest of this section concentrates on the
132 Chapter 4

The Kaldor-Model
IU.O

uo.o

uu

..
uo.o
UI.O
w as
I I 10 n ao u OS
"
PKIUODS
~

110.1

l<O. I

uo.o
lU. O

>-
....
10. 0

••••
.. .. .. ..
10.0

I lO u 10 u 10
" IS 10
PIDUODS
» •• II lO n u 110

&= :1.00 a= 20.00 ltu = 2115.00

c= 20.000 4= 0.050 Y11 = 15.00
4= 0.0100 t= 0.00001
•= 0.0500 •= 0.21 It,. = 211.00
f = 280.00 '{ .. =11.00
I = ,.50 II.= 1000

Two Time Series With Different Initial Values

Figure 4.16

notion of snap-back repellers introduced by Marotto (1978). Consider a discrete-time

dynamical system

Xt+I = f(xt), X E Rn (4.1.34)

with an unstable fixed point x* = f(x*) .

Definition 4.5 Marotto (1978)

Let Br(x*) denote the closed ball with radius r in Rn centered at x*. The
point x* E Rn is an expanding fixed point of f(x) in Br(x*) if f(x*) = x*
and all eigenvalues of the Jacobian of f(x) exceed 1 in (Euclidian) norm for all
X E Br(x*).
 4.1.5. Chaos in Higher-Dimensional, Discrete-Time Systems 133

This definition does not imply that a time series moves away from x* everywhere. If
x ¢. Br(x*) for an arbitrary r, the eigenvalues may be less than or equal to 1. Once a
point outside Br( x*) is reached, Xt may jump back into Br( x*) and even onto x*. In
that case the fixed point is called a snap-back repeller:

Definition 4.6 Marotto (1978)

Assume that x* is an expanding fixed point off in Br(x*) for some r. Then
x* is said to be a snap-back repeller off if there exists a point x 0 E Br(x*)
with x 0 =j; x*, f(k)(x 0 ) = x*, and the determinant of the Jacobian of f(k)(x 0 )
is different from zero for some positive integer k.

Figure 4.17 illustrates this notion of a snap-back repeller: A trajectory which starts
arbitrarily close to the fixed point x*, i.e., at a point x 0 in Figure 4.17, is repelled from
this fixed point, but, after having left Br(x*), suddenly jumps back to hit the fixed
point exactly. A snap-back repeller is the discrete-time analogue of a homoclinic orbit
to be introduced in Section 4.2.4.

A Snap-Back Repeller
Figure 4.17

Theorem 4.6 Marotto (1978)

Iff possesses a snap-back repeller, then (4.1.34) is chaotic.

Marotto's definition of chaos is qualitatively identical with the chaos definition of Li/
Yorke for one-dimensional maps.
134 Chapter 4

Herrmann {1985) studied the following two-dimensional, discrete-time business

cycle model with Kaldorian elements:

D.Yt+I = a(I(Yi, Kt) + C(Yi)- Yi)

(4.1.35)
D.Kt+I = l(Yi, Kt)- 8Kt

with I(yt, Kt) = f3(Kf - Kt) + 8Kt. f3 > 0, as gross investment, and 8 > 0 as the
depreciation rate. Net investment depends proportionally on possible discrepancies
between the desired and actual capital stock. If the desired capital stock depends
linearily on output, i.e., Kf = kyt, k > 0, and if the consumption function C(Yi) has a
sigmoid shape known from the Kaldor model 42 , equations (4.1.35) become

D.Yi+I = a(f3(kyt- Kt) + 8Kt + C(Yi)- Yi)

(4.1.36)
.6.Kt+1 = {3(kyt- Kt)

or, abbreviated,
Yi+I = FI(Yi,Kt)+ Yi =: GI(Yi,Kt)
( 4.1.37)
Kt+1 = F2(Yi, Kt) + Kt =: G2(Yi, Kt)
with
F1(Yi, Kt) = a(f3(kyt- Kt) + 8Kt + C(Yi)- Yi)
(4.1.38)
F2(Yi, Kt) = {3(kyt- Kt).
The Jacobian of (4.1.37) is calculated as

J = ( Fn +1 F12 ) (4.1.39)
F21 F22 +1
with
dC(Yi)
Fu = a(f3k + ~ -1)
F12 = a(8- {3) (4.1.40)
F21 = {3k
F22 = -{3.

42 Herrmann (1985) used a consumption function of the form

C(yt) =co 2 arctan (1l"C2

+ c1 + -c1 -(Yi - Y *))
1r 2c 2

with co, c1, c2 > 0 and Y* as the equilibrium level of income.

 4.2.1. Basic Ideas 135

The eigenvalues of J are

(4.1.41)

It is easy to find numerical specifications of the parameters such that F 11 and F 22 ,

evaluated at equilibrium, are absolutely smaller than one, implying that the eigenvalues
lie outside the unit circle. The equilibrium is therefore an unstable fixed point. As the
model is nonlinear, the entries in the Jacobian change for varying (Yi, Kt). Eventually,
the eigenvalues may thus change so that they lie within the unit circle. The Euclidian
distance between the equilibrium and the maximal values of (Yt, Kt), for which the
modulus is smaller than 1, can easily be computed and is identical with the radius r of
the ball Br mentioned in Definition 4.5.
For a certain parameter set Herrmann (1985) was able to detect an initial point
in a neighborhood Br of the equilibrium that left the neighborhood during the first
iterations and jumped to the equilibrium in the 12th iteration. It follows that the
discrete-time Kaldor model (4.1.37) has a snap-back repeller for the specific parameter
set. As Marotto (1978) pointed out, snap-back repellers persist under small perturba-
tions of the model and variations in the parameter set. It has to be noted, however,
that the result of any numerical example cannot be generalized to hold true for the
entire range of parameter values of a certain model. The concept of snap-back repellers
requires a separate numerical study for each numerical specification of a model.

4.2. Chaos in Continuous-Time Dynamical Systems

Most existing economic models dealing with the chaos property are discrete-time models
that can be reduced to a one-dimensional dynamical system; the two-dimensional case is
already much more difficult to handle. However, chaos does not occur only in discrete-
time models, but may be a property of continuous-time models as well.

4.2.1. Basic Ideas

In the one-dimensional, discrete-time case, chaos according to the Li/Yorke definition

is characterized by the simultaneous presence of multiple periodic and aperiodic orbits.
The sequence of points may jump irregularly in the appropriate interval on which the
map is defined. Equivalently, in higher-dimensional, discrete-time systems the sequence
of points can jump irregularly in the space of the variables. As the motion of variables
in differential equations assumes an infinitesimally small time step, the evolution will
be smooth and the jumps typical for discrete-time systems thus cannot occur. In fact,
136 Chapter 4

while in discrete-time systems a chaotic motion is described by a sequence of seemingly

arbitrarily jumping points, chaos in a continuous-time dynamical system appears as the
irregular wandering of the entire trajectory in phase space.
One of the most prominent, chaotic, continuous-time dynamical systems is the
Lorenz attractor, named after the meteorologist E.N. Lorenz who investigated the three-
dimensional, continuous-time system

x=s(-x+y)
y = rx- y- xz, s,r,b > 0, ( 4.2.1)
z = -bz + xy

emerging in the study of turbulences in fluids. For r above the critical value r = 28.0,
the trajectories of ( 4.2.1) evolve in a rather unexpected way. Suppose a trajectory starts
at an initial value in the center of the lower left wing in Figure 4.18. For some time the
trajectory regularly spirals outward in the region described by that wing. However, the
trajectory eventually leaves the lower left wing, wanders to the center of the upper right
wing, and starts spiraling outwards again. When the trajectory has reached a region
far enough away from the center, it again wanders toward the lower left wing and the
story repeats. As the trajectory does not necessarily have to pass the initial starting
point, the trajectory in this second round can differ completely from that in the first
round: the trajectory may wander through different points in phase space and may need
a longer time before it turns toward the second wing. When the time horizon is long
enough, both wings will be densely filled by the trajectory.
Note however, that the two wings do not exist isolated from the motion itself. It is
the evolution of the system that generates the geometric shape shown in Figure 4.18. 43
As trajectories starting at different initial values all converge to and remain in the same
region with the two wings, the region is an attractor. It is a strange attractor because
it is neither a point nor a closed curve, where a closed curve may be a complicated
geometric object. The notion of a strange attractor was introduced by Ruelle/Takens
in 1971.
The geometric shape of Figure 4.18, which will be called the Lorenz attractor in
the following, is astonishing because the nonlinearities in ( 4.2.1) are relatively weak as
compared with other quadratic or higher-order first derivatives. A strange attractor
with even weaker nonlinearities is the Rossler attractor shown as a projection on the

43 The notion of the trajectory's wandering on a wing is therefore only used for illus-
trative purposes.
 4.2.1. Basic Ideas 137

w"( pl

The Lorenz Attractor

Source: Lanford (1977)
Figure 4.18

( x - y) plane in Figure 4.19, the underlying differential equation system of which reads

x = -(y + z)
iJ = x + ay, a, b,c > 0. (4.2.2)
z = b + z(x- c)
The critical region in this attractor is the folding on the right side where the exact
location determines the amplitude of the next oscillation.
While there is no common agreement on the strangeness of a strange attractor, the
following definition summarizes the verbal description given above:

Definition 4. 7 (Ruelle (1979))

Consider the n-dimensional dynamical system

X• = f(x ,p,) x E Rn, rll ER (4.2.3)

with fL as a parameter. A bounded set A C Rn is a strange attractor for

(4.2.3) if there is a set U with. the following properties:
i) U is ann-dimensional neighborhood of A.
138 Chapter 4

18.0

14.2

10.4

6.6

2.8

>. -1.0

-4.8

-8.6

-20.0 L___L __ _L __ _~--~--~--~--~--~--~--~

- 18.0-14.2-10.4 - 6.6 - 2.8 1.0 4 .8 8.6 12.4 16.2 20.0
X

The Rossler Attractor

Figure 4.19

ii) If x(O) E U, then x(t) E U V t > 0 and x(t) -+ A, i.e., any trajectory
approaches and remains arbitrarily close to A for t large enough.
iii) There is a sensitive dependence on initial conditions when x(O) is in U,
i.e., small variations in the initial value x(O) lead to essentially different
time paths of the system after a short time.
iv) The attractor is indecomposable, i.e. , it cannot be split into two or more
separate pieces.

If a dynamical system possesses a strange attractor, the associated power spec-

tra exhibit a continuum of involved frequencies 4 4, i.e., the motion is comparable to a
stochastic process with broadband noise. As in the case of stochastic motion, the be-
havior of the system is numerically unpredictable. The sensitive dependence on initial
conditions as expressed in item iii) of Definition 4.7 implies that the trajectories of two
arbitrarily close initial points may differ completely after some time.
In the following, chaos in continuous-time dynamical systems will be identified with
the existence of a strange attractor:

Definition 4.8

A dynamical system ( 4.2.3) is chaotic if it possesses a strange at tractor in the

sense of Definition 4.7.

44 Cf. Section 4.3. for details on numerical and statistical techniques.

 4.2.1. Basic Ideas 139

The sensitive dependence on initial conditions shows that continuous-time dynam-

ical systems with a strange attractor perform in a way comparable to chaotic discrete-
time dynamical systems. It has to be kept in mind, however, that for a sufficiently
short time interval a chaotic trajectory in a continuous-time system seems to behave
regularly with a smooth evolution of the variables over time. The irregularity in these
systems appears in the emergence of a sequence of cycles with different amplitudes and
frequencies.
While chaotic dynamics in discrete-time systems can already occur in one-dimen-
sional systems like the logistic equation, the equivalent phenomenon in continuous time
is restricted to at least three-dimensional systems. Canonically, chaos cannot occur
in two-dimensional systems because a trajectory cannot intersect itself. The cyclical
motion in a two-dimensional system is thus restricted to a monotonically damped or ex-
plosive oscillation and closed orbits. The fact that chaos can occur in three-dimensional
systems like ( 4.2.1) or ( 4.2.2) can be illustrated with the help of so-called Poincare
sections and maps.
Consider first the trajectory of a planar continuous-time system and suppose that
the system converges toward the equilibrium as shown in Figure 4.20.a. Draw a straight
line through the trajectory and mark the points of intersection of the line and the
trajectory every time the trajectory crosses the line in the same direction. The set
of all points of intersection is called the Poincare section. Denoting the first point
of intersection as x 1 , the next as x 2 , etc., a sequence of points {xi} is constructed
depending on the motion in the differential equation system: given a certain Xi, the
point Xi+t is determined as well, provided the solution of the differential equation is
known. The sequence {x;}~ 1 is therefore generated by a map P: R---+ R, which maps
Xi to Xi+t according to the motion in the vector field. The map Pis the Poincare map
of the continuous-time dynamical system.
The interesting property of this Poincare map consists of the fact that the map
provides complete information on the qualitative behavior of the original differential
equation though the dimension of the map is reduced to n - 1. In Figure 4.20.a, the
damped oscillation in the differential equation system is represented by a converging
sequence of points toward a fixed point in the Poincare map. Equivalently, if the tra-
jectory of the differential equation system describes a closed orbit, the Poincare map
consists of a single point which is not the stationary equilibrium. Obviously, a pla-
nar dynamical system can only have Poincare maps exhibiting stationary fixed points
or monotonically increasing or decreasing sequences of points {xi}. Suppose that the
sequence of points belonging to the Poincare section of a planar differential equation
system are located on a line like the one in Figure 4.21. The dynamical behavior of this
map can be analyzed in the same way as with a usual one-dimensional map, i.e., the
45° line can be used to demonstrate the evolution of Xi. As the graph in Figure 4.21 is
monotonically increasing with a slope less than 1 at the fixed point, the sequence {Xi}
140 Chapter 4

4.20.a: n = 2 4.20.b: n =3
Poincare Sections of a Continuous-Time Dynamical System
Figure 4.20

converges toward this fixed point regardless of the initial value of x. According to the
principles in constructing the map, the differential equation system is therefore charac-
terized by convergence toward a stable limit cycle. Alternatively, a diverging sequence
in the Poincare map corresponds to an unstable cycle.

The Dynamic Behavior in a Poincare Map (n = 2)

Figure 4.21

Consider next a three-dimensional system whose trajectory forms the spiraling

curve in Figure 4.20.b. The Poincare section is generated by laying a two-dimensional
plane through the trajectory. The sequence of the two-dimensional points of intersection
thus forms a two-dimensional mapping. For the case of the Lorenz attractor, this two-
 4.2.1. Basic Ideas 141

!Y
J)l

20
;·
1l
.c
X
-Jl -20 -ll 10 20 J)

c'. -ll

I -·!
-:I)

The Two-Dimensional Poincare Map of the Lorenz Attractor

z = constant. Source: Berge et al. (1986), p. 126.
Figure 4.22

dimensional Poincare map is illustrated in Figure 4.22. The map seems to consist of
two separate segments, each corresponding to a separate spiraling motion around one of
the two (unstable) equilibrium points C and C'. While this view of the two-dimensional
Poincare map does not provide essential new insights into the character of the underlying
differential equation system, the inspection of only one variable in the Poincare map
uncovers the presence of complex behavior in the three-dimensional Lorenz system. The
jirJt return map is defined as the sequence { x{} ~ 1 of a single variable xi; j = 1, 2, 3 on
the Poincare section. 45
For technical convenience it is useful to study the first return map on the Poincare
section generated by the surface on which one of the variables does not change, i.e.,
where it reaches a local extremum. The first return map for the variable z of the Lorenz
equations is shown in Figure 4.23. The Poincare section was created by the surface with
i = 0. As z changes its direction on this surface, the map shown in Figure 4.23 thus
describes the successive extremal values (the maximal values actually) of the coordinate
z in the attractor: let z; be the maximum value of z the first time the attractor performs
a cyclical round, then Zi+I will be the maximal z value in the next round.
The first return map in Figure 4.23 is a noninvertible, one-dimensional map and can
therefore be studied by means of the techniques presented in Section 4.1.1. The slope of
the fictitious curve on which the observed pairs (z;, Zi+I) are located is absolutely larger
than one at the point of intersection with the 45° line, indicating possibly complex
behavior. As all realized points of the first return map nearly form a continuous curve,
it is likely that chaos is present in this map. When chaos prevails in this first return

45 One-dimensional Poincare maps are of course identical with the return map.
142 Chapter 4

' .
:

·' \
/
,·

,.··
/

A First Return Map of the Lorenz Attractor

i = 0; Source: Berge et al. (1986), p. 127
Figure 4.23

map, then the behavior of the original flow is also characterized by irregular motion,
i.e., the orbits in the flow erratically change their diameter in the z direction.
These considerations therefore demonstrate that it is indeed possible to encounter
chaotic dynamics in at least three-dimensional flows. As was pointed out above, chaos
in continuous-time dynamical systems cannot be established via general and simultane-
ously simple characteristics of these systems like, e.g., in one-dimensional, discrete-time
equations. During the last decades, a variety of higher-dimensional systems belonging
to completely different families has been investigated proving the presence of a strange
attractor. 46 On the other hand, the lacking knowledge of the general structural proper-
ties of chaotic higher-dimensional systems prevented the definite categorization of some
systems as chaotic though the numerically observable irregularities in such systems
let them appear as good candidates for chaotic systems. 47 In the following sections,
two classes of dynamical systems will be presented together with economic applications
which are fairly well understood in the dynamical systems literature, namely coupled os-
cillator systems and forced oscillators. The last subsection ends with an outline of some
general properties of choatic dynamical systems and the presentation of an economic
example of spiral-type attractors.

46 A summary of known chaotic dynamical systems can be found in Garrido/Sim6

(1983), pp. 14 ff.
47 The usual quotation in this context concerns the Henon map which is a special
form of equation (4.1.32). Though the map is almost always cited as an example of
a two-dimensional discrete-time chaotic system, the identification of its dynamical
behavior as chaotic is not undisputed. Cf. Ott (1981), pp. 660/f.
 4.2.2. The Coupling of Oscillators 143

4.2.2. The Coupling of Oscillators

Toroidal Motion

Some of the simplest and also most fascinating dynamical systems with respect to
the complexity of the generated trajectories belong to the class of coupled oscillator
systems, i.e., systems whose separate motion depends on the dynamic behavior of other
oscillators as well. Coupled oscillator systems are interesting not only with respect to
chaotic dynamics but they may also display regular motion which in fact is strikingly
complex.
Consider for example a set of two independent, two-dimensional, nonlinear oscilla-
tors, i.e., dynamical systems generating endogenous fluctuations:

:X:= f1(x)
( 4.2.4)
Y= f2(y)

and let both oscillators represent dissipative systems. 48

In ( 4.2.4) the motion in each of the two oscillators depends entirely on the value of
the variables x;, i = 1, 2, and y;, i = 1, 2, respectively, in the isolated oscillators. Sup-
pose that each oscillator generates a motion in a limit cycle which is a one-dimensional
geometric object in the plane. Assume that this limit cycle is equivalent to the unit
circle S 1 , i.e., a circle with radius r = 1.
Though both oscillators are independent it is useful to consider the joint motion
of the variables. This motion of the four variables x = (x 1,x 2) andy= (y 1,y2) in
(4.2.4) takes place on an object which is the product of the two limit cycles, namely
S 1 X S 1 . This geometric object in four-dimensional space is called a two-dimensional
torus. Heuristically, a motion on a torus may be characterized by an oscillation in the
horizontal direction and another one in the vertical direction. Figure 4.24.a depicts a
two-dimensional torus in three-dimensional space. Figure 4.24.b illustrates the same
torus as in Figure 4.24.a, but it has been cut in the middle and formed into a cylinder.
The figure demonstrates that a horizontal and a vertical cyclical component are involved
in the motion on the torus. The tori in Figures 4.24.a and 4.24.b are two-dimensional
objects because they can be constructed from a two-dimensional plane by appropriate
bending and gluing.
A trajectory on a torus may form simple closed curves as well as rather complicated
ones. Consider an initial point of a dynamical system like (4.2.4) located on the surface
of a two-dimensional torus. Denote the frequencies involved in the motion of each of the

48 The alternative consideration of conservative dynamical systems ( cf. Section 2.4.1)

will be neglected in the rest of the book because those systems do not seem to be
generic in economics.
144 Chapter 4

4.24.a

4.24.b
A Two-Dimensional Torus with its Cyclical Components
Source: Thompson/Stewart (1986), p. 92
Figure 4.24

two independent oscillators as w;, i = 1, 2. The following types of oscillatory motion on

the torus can be distinguished:

• Both separate motions decribe a closed curve at the same time, i.e., when the two
cycles are completed the system has reached the initiaL,point again. The frequencies
w 1 and w 2 are identical.
• One of the oscillators describes a closed curve faster than the other but the ratio
of the involved frequencies is a rational number, for example wi/w2 = 2. In that
case the first oscillator generates two complete cycles while a single closed orbit
was described in the second oscillator. The system passes the initial point on the
torus after two oscillations in the first oscillator.
• Again, one of the oscillators generates a faster motion, but the ratio of the involved
frequencies is irrational, e.g., wi/w2 = 1r. In that case the trajectory on the torus
will never meet its initial point again. Instead, the entire surface of the torus will
eventually be densely covered by the trajectory. The motion is then said to be
qu.a3i-periodic.
 4.2.2. The Coupling of Oscillators 145

4.25.a.: Rational Frequency Ratio 4.25.b.: Irrational Frequency Ratio

Trajectories on a Two-Dimensional Torus (Projection)
Figure 4.25

Figures 4.25.a and 4.25.b contain two-dimensional illustrations of the motion on a

two-dimensional torus for a set of parameter values such that the ratio of the frequencies
is rational (cf. 4.25.a) and irrational (cf. 4.25.b ). The surface of the torus is unwrapped
such that a trajectory reaching, for example, the upper edge of the plane reappears on
the lower edge. While a trajectory returns to the starting point after one or more orbits
in the rational case, the trajectory in Figure 4.25.b never lies on a closed curve. 49 A
projection of a trajectory on a two-dimensional torus onto the plane is shown in Figure
4.26. lnspite of its complexity the trajectory on the torus behaves regularily nonetheless
in the sense that there is no sensitive dependence on initial conditions. Note further
that the oscillation of the separate oscillators is, when isolated, still characterized by a
limit cycle behavior in its variables. 50
Alternatively, suppose that the motion of the variables in both oscillators depends
also on the motion in the other oscillator, i.e.,

x=fl(x,y)
(4.2.5)
y = f2(x,y)'
or, in other words, that the two two-dimensional oscillators are coupled. The general

49 Cf. Haken (1983b), pp. 28£. for details.

50 It may be argued that the geometric complexity is therefore of no economic interest
since the oscillators are independent. However, if the two oscillators describe the
actual values of variables like, for example, unemployment and prices, both variables
will surely be considered simultaneously because of several macroeconomic reasons.
146 Chapter 4

Projection of the Motion on a Two-Dimensional Torus

Source: Puu (1987), p. 251
Figure 4.26

case of m coupled, £-dimensional oscillators can be written as

X•1 = f1( X 1 ,X2 , ... ,Xh , ... ,Xm ,p. )

X• h = fh( X 1 ,X2 , ... ,Xh , ... ,Xm ,p. ) , ( 4.2.6)

•m
X = rm( X 1 ,X2 , . .. ,X h , ... ,X m,p. )

with p. as a parameter. 51 Assume that (4.2.6) possesses complex conjugate eigenval-

ues and that for low values of the parameter p. the attractor of the system is a fixed
point. By increasing the parameter, a Hopf bifurcation52 may occur, i.e., a pair of
complex conjugate eigenvalues becomes purely imaginary and a closed orbit emerges in
a neighborhood of the fixed point.
A further increase in the parameter p. may generate a second Hopf bifurcation.
In that case the former limit cycle bifurcates into a two-dimensional torus. Analyti-
cally, this second bifurcation can be determined only in special cases: the first Hopf
bifurcation makes use of the Jacobian evaluated at equilibrium, i.e., the entries of the
matrix are constants. However, in the case of a limit cycle, the entries of the Jacobian
vary continuously with time, depending on the location of the system on the cycle, i.e.,

51 Equation (4.2.5) is then the special case of (4.2.6) with l = 2 and m = 2.

52 Cf. Section 3.1.2.
 4.2.2. The Coupling of Oscillators 147

the Jacobian becomes time-dependent. It must therefore be assured that another pair
of eigenvalues becomes purely imaginary independent of the location of the system on
the limit cycle. For the sake of simplicity, assume that such a second Hopf bifurcation
indeed takes place.
Provided that the dimension of the dynamical system is large enough, further bifur-
cations may lead to the emergence of a three-dimensional torus, T 3 , a four-dimensional
torus, T 4 , etc. Every bifurcation increases the complexity of the motion. This scenario
long served as the standard model for the onset of turbulences. A low-dimensional
system can involve only a few Hopf bifurcations, and the complexity of the motion is
limited. If a higher degree of complexity is to be modelled, more variables (degrees of
freedom) must be included in the analysis so that more bifurcations can occur. In the
limit, an infinite number of variables and a large number of bifurcations resembles a ran-
dom process which is considered to be the appropriate decription of turbulence. Table
4.2 schematically describes this so-called Landau scenario for the onset of turbulence.

Fixpoint
i i i i
(1st Hopf) (2nd Hopf) (3rd Hopf) (nth Hopf)

The Landau Scenario for the Onset of Turbulences

Table 4.2

A major drawback of this scenario is the fact that even after a large number of
bifurcations the motion is not sensitive to inital conditions. Initial points which are
close together will stay close together as time ellapses. This regularity aspect obviously
contradicts the intuitive notion of turbulence involving the idea of an arbitrary motion
of, for example, a particle. 53
Another possibility for the onset of turbulence was proposed by Ruelle and Takens
in 1971. Instead of an infinite number of bifurcations as a prerequisite for the onset
of irregular behavior, the Ruelle/Takens scenario implies that already after three Hopf
bifurcations the motion can become chaotic.

53 In fact, the Landau scenario could not be observed experimentally in the natu-
ral sciences. The successive emergence of higher-dimensional tori would imply the
emergence of an increasing number of incommensurate frequencies in the associated
power spectra (cf. Section 5.1). However, only a few dominant frequencies together
with linear combinations could be observed in, e.g., Buid dynamics laboratory ex-
periments. Cf. Berge et al. (1986), pp 165ff.
148 Chapter 4

Theorem 4.7 (Newhouse/Ruelle/Takens (1978))

Let x = ( x 1 , ••• , Xm) be a constant vector field on the torus Tm.
If m = 3, in every C 2 neighborhood of x there exists an open vector field with
a strange attractor.
If m ~ 4, in every coo neighborhood of x there exists an open vector field with
a strange at tractor.

When the dimension of the dynamical system is high enough and when the motion
takes place on an at least three-dimensional torus (for example, via three successive
Hop£ bifurcations) then there may exist a strange at tractor in the neighborhood of the
torus. If the system is slightly perturbed, it may not move on the torus anymore, but
may instead be attracted by the strange attractor, i.e., the motion becomes chaotic.
This Ruelle/Takens scenario is schematically described in Table 4.3.

Fixpoint Chaos
i i i
(1st Hopf) (2nd Hopf) (3rd Hopf)

The Ruelle/Takens Scenario

Table 4.3

International Trade as the Coupling of Oscillators

As a naturally emerging economic example of coupled oscillator systems consider the

following very simple Keynesian macroeconomic model of a single economy54 with Y
as income, r as the interest rate, and M as the (constant) nominal money supply, and
assume that the goods prices, p, are fixed during the relevant time interval. Suppose
that gross investment, I, and savings, S, depend both on income and the interest rate
in the familiar way, i.e.,

I = I(Y, r ), Iy > 0, Ir < 0

and
S = S(Y,r), Sy > 0, Sr > 0.
54 The following example is adopted from Lorenz (1987a) and relies on a model orig-
inally studied by Torre (1977) in the context of bifurcation theory. Another eco-
nomic example of coupled oscillator systems in the context of international trade
can be found in Puu (1987).
 4.2.2. The Coupling of Oscillators 149

Income adjusts according to excess demand in the goods market, i.e.,

Y = a(I - S), a > 0. (4.2.7)

The set of points { (Y, r) I I(Y, r) = S(Y, r)} constitutes the IS curve of the model.
Let L(Y, r) denote the liquidity preference with Ly > 0, Lr < 0, and assume that
the interest rate adjusts according to

r=f3(L(Y,r)-Mfp), /3>0 (4.2.8)

with the set of points {(Y, r) I L(Y, r) = M / p} forming the LM curve of the model.
Let (Y*, r*) be the unique equilibrium of the system and assume that it is unstable.
Assume further that equations ( 4.2. 7) and ( 4.2.8) constitute a nonlinear oscillator such
that the model generates endogenous fluctuations. 55
Consider now three economies, each of which is described by equations like ( 4.2. 7)-
(4.2.8) with possibly different numerical specifications of the functions, i.e.,

Y; = a;(I;(Y;,r;)- S;(Y;,r;))
i = 1,2,3. (4.2.9)
r; = /3; (L;(Y;, r;)- M;fp;)

The equation system ( 4.2.9) constitutes a six-dimensional differential equation system

which can also be written as a system of three independent, two-dimensional limit cycle
oscillators. If all three economies are indeed oscillating, the overall motion of system
(4.2.9) constitutes a motion on a three-dimensional torus T 3 .
By introducing; international trade with linear functions Ex; = Ex;(}j, Yk), i ~ j, k
and Im; = Im;(Y;), equation system (4.2.9) becomes

Y; = a;(I;(Y;, r;)- S;(Y;, r;) + Ex;(Yj, Yk)- Im;(Y;))

(4.2.10)
r; = /3;(L;(Y;,r;)- M;fp;),

with i,j, k = 1, 2, 3, j, k ~ i, and M; as the money stocks reflecting balance of payments

equilibria. Equation system (4.2.10) constitutes a system of coupled nonlinear oscillators
which can be understood as a perturbation of the motion of the autonomous economies
on a three-dimensional torus. The Newhouse/Ruelle/Takens (1978) theorem therefore
implies that the international trade system ( 4.2.10) may face a strange at tractor.
This procedure of coupling autonomous oscillators can be applied to a variety of
different economic problems. A first investigation of the influence of dynamic coupling

55 As was demonstrated in Chapters 2 and 3, it is easy to specify the functions I, S,

or L such that the requirements of the Poincare/Bendixson theorem or the Hop£
bifurcation theorem are fulfilled.
 1-'
Cl1
0

A Multisector Kaldor-Model
...... ......
0
...
::T ...... .....,
...~
;· .,.
en
0
.:: ~
"1 0 3~:
......
n ...
c;· ...
~ ~ ...
::l N
:lC ,.,,
c;q· ;;: ...
"1
.., 0t"' :r
= , Q
('D ~1:1' ..... {;
::l ....
!l:>o N ~
~,...-.._.:: ~
...... ,__ -
--.coc:
00 Cll
...... ""'
-l ~
r:r n
'-"0 ...... ......
"1
m
-
~
.......
0
~ :L
.. -,~.-~ .---.-. .. -~-~,.----..,- - - - ,
.. ..- --,,..
•• •• .. •• .. ••
~
...•• •• ... Y2
Yl

• : ~.00 o• 3.0000 Ku::;;. 390.00 = 0.00~ ~AG- D021JDE

dK ,/dt • 1, - ~. K,
2~.000 0.0~00 Yu = 60.00 ..•u, : 0.005 (Ruoa,.- KuUe - Werson )
d. 0.0150
·=
"'6z-= 0.0~0~ •u = 0.00~ dY /dl =" ( 11 - sY 1+!:: •u Y1) Step.site: I.
•• 0.0~00 6, = 0.0~10 Tolenmc~: 10- ~
J, = c 2 -1./(dY, + t )2 + eY + A(f/K,.)g
f . 320.00 0.00001 Plol.n\lrnbe-r: :z22249
'. ' '
' : 3 .00 02 0.29 n • 9~00 Pace I
 4.2.3. The Forced Oscillator 151

was presented by Goodwin (1947) in the context of interdependent markets. Larsen/

Mosekilde/Rasmussen/Sterman (1988) studied frequency-locking behavior in a business
cycle model that attempts to explain long waves. A multisector, Kaldorian-type business
cycle model with a structure essentially identical with the international trade model
presented above was studied by Lorenz (1987b ). If the coupling between three different
sectors of an economy takes place via the demand for investment goods delivered from
other sectors, and if the coupling is unidirectional, i.e., sector i receives goods from
sector j, but delivers goods only to sectors h, h -:f. j, which are closer to the final
demand, then a strange attractor can numerically be shown to exist. Projections of
the numerically simulated attractor onto the space of intra-sectoral variables K; and
Y;, i = 1, 2, are depicted in Figure 4.27. While the third and final demand sector is
characterized by limit cycle behavior, the delivering first two sectors oscillate irregularly
with varying frequencies and amplitudes. 56

4.2.3. The Forced Oscillator

In a series of papers, Levinson (1943a,b, 1949), Cartwright/Littlewood (1945), Cart-

wright/Reuter (1987), and Littlewood (1957a,b) demonstrated that the introduction of
dynamic forcing in the van der Pol equation can involve a kind of dynamic behavior
which at that time was assigned to stochastic dynamical systems alone. In fact, these
post-war studies laid the foundation for the introduction of the horseshoe map by Smale
(1963, 1967). Recent geometric methods in the study of nonlinear dynamical systems
have revived the interest in forced oscillator systems (e.g., Levi (1981), Guckenheimer/
Holmes (1983), Tomita (1986) ). 57
While forced oscillator systems naturally emerge in theoretical investigations of
several physical and technical devices, economic examples for this special family of
functions have only rarely been provided. The main reason for this deficiency may lie
in the fact that

• reasonable economic justifications must be provided for the fulfillment of some

necessary symmetry conditions, and
• the necessary periodicity of the dynamic forcing may not be obvious in most eco-
nomic applications.

In the following, two economic examples of forced oscillator systems will be presented.
After a short and more or less heuristic introduction to the mathematics of forced

56 For details compare Lorenz (1987b ).

57 Further investigations of forced oscillator systems can be found in, e.g., Abraham/
Scott (1985).
152 Chapter 4

and unforced oscillator systems it will be shown that Goodwin's nonlinear accelerator
model with autonomous investment outlays as well as a simple macroeconomic demand-
stabilization model can imply the existence of a forced oscillator system.

Forced Oscillator Systems and Chaotic Motion

Consider a nonlinear, autonomous, second-order differential equation

x + f(x)x + g(x) = 0. (4.2.11)

Recall from Section 2.3. that equation ( 4.2.11) is able to generate endogenous oscilla-
tions if the functions f( x) and g( x) fulfill certain requirements. For example, if f( x) is
an even function with positive second derivative and two zero roots, and if g( x) is an
odd function with positive first derivative, the equation possesses a limit cycle.
The autonomous equation (4.2.11) is a special case of the more general form

x + f(x)x + g(x) = h(t), (4.2.12)

with h(t) as a periodic function, i.e., h(t) = h(t + b.t) Vt. As time enters the equation
explicitly, ( 4.2.12) is called a nonautonomous differential equation. Equation (4.2.12) is
called a forced oscillator when f(x) and g(x) fulfill the requirements of an oscillator. If
the amplitude of the forcing term h(t) is small relative to the damping f(x), (4.2.12) is
called a weakly forced oscillator. Otherwise, the oscillator is called strongly forced.

I
I
I
I
I
I
I "
1,
.t
"I
/ I
I
I
I
I
I
I

The Levi-Poincare Map of the Strongly Forced Oscillator

Figure 4.28
 4.2.3. The Forced Oscillator 153

While the weakly forced oscillator does not add essentially new qualitative proper-
ties to the dynamical behavior of ( 4.2.11) - in fact, the oscillator is still characterized
by limit cycle behavior - the strongly forced oscillator may involve the emergence of
irregular dynamics. Consider the following special form of equation ( 4.2.12), 1.e., a
dynamically forced van der Pol equation

x- a(1- x 2 )x + x = acoswt, (4.2.13)

with a determining the amplitude of the forcing term and w as the involved frequency.
When a is large, the dynamic behavior of ( 4.2.13) can be described by a one-dimensional
geometric approximation of the involved Poincare map, which will be called the Levi-
Poincare map in the following. 58
Figure 4.28 shows the Levi-Poincare map of equation (4.2.13). According to the
construction of Poincare maps, a fixed point of the map corresponds to a closed orbit in
the original flow. The four fixed points A through D in Figure 4.28 therefore represent
four closed orbits of equation ( 4.2.13). As the absolute slopes of the graph of the Levi-
Poincare map are smaller than 1 at the fixed points A and D, the corresponding closed
orbits in the flow are stable. Equivalently, the unstable fixed points B and C represent
unstable closed orbits. Figure 4.29.a shows a possible constellation of the four orbits.
The outer and inner cycles are stable, while the two winding closed curves are unstable
orbits.
The existence of two stable closed orbits implies that the dynamic behavior of
(4.2.13) depends on the initial conditions. If a trajectory starts at an initial point in
phase space corresponding to a point to the left of B or to the right of C in the Levi-
Poincare map, the trajectory will converge toward the closed orbit corresponding to
points A or D, respectively. As is the case in all dynamical systems with more than one
limit cycle, the initial point therefore determines the final state of the system.
In contrast to dynamical systems exhibiting multiple limit cycles with alternatively
stable and unstable orbits the forced oscillator allows for a more complicated dynamic
behavior. When the initial point of the system is located to the right of B and to the
left of C, a sequence of points in the Levi-Poincare map will obviously approach neither
B nor C because of their instability. In order to get an intuitive understanding of the
dynamic behavior, consider an enlargement of the region B-C (cf. Figure 4.30).
It is possible to find initial values in this region of the Levi-Poincare map which

58 For details on the construction of the Levi-Poincare map see Levi (1981) and Guck-
enheimer/Holmes (1983). While the dimension of this map is lower than the orig-
inal two-dimensional Poincare map, it still provides the same information on the
dynamical behavior of the original three-dimensional eq. ( 4.2.13).
154 Chapter 4

L______ :_~~~~~~-------~
4.29.a: Stable and Unstable Orbits 4.29.b: An Enlargement
Orbits in the Forced Oscillator
Figure 4.29

The Region B-C of the Levi-Poincare Map

Figure 4.30

generate a period-three cycle, namely

(4.2.14)

As is well-known from the theory of one-dimensional maps, the existence of a period-

three cycle implies the existence of chaotic motion in this map. The same qualitative
property persists in the original Poincare map of which the Levi map is an approxima-
tion. As chaotic motion in a Poincare map implies irregular behavior of the underlying
flow as well, the essentially three-dimensional differential equation ( 4.2.13) is therefore
 4.2.3. The Forced Oscillator 155

characterized by chaotic motion as long as its trajectory is located in a region corre-

sponding to B-C in the Levi-Poincare map. The chaotic motion in the original flow
is described by intersecting spiraling trajectories in the projection to the phase space
(x,x) with varying amplitude and frequency. As in one-dimensional maps, the flow is
sensitive to initial conditions.
Note, however, that the region B-C in the Levi-Poincare map is not a trapping
region. The system may leave the region and eventually converge to one of the two
stable fixed points A or D. The dynamic behavior is then characterized by transient
chaos.
Summarizing, the strongly forced oscillator is characterized by the following prop-
erties:
• Depending on the amplitude of the forcing term there may be three or four fixed
points in the Levi-Poincare map.
• Depending on the inital values, the system monotonically approaches one of the
two stable fixed points in the Levi-Poincare map, i.e., one of two stable closed orbits
with different amplitudes in the original flow, or
• the trajectory stays in a bounded region for some time where it behaves chaotically.

Whether or not there is a chaotic region in the Levi-Poincare map for a certain dynamical
system under consideration depends on the exact algebraic and numerical specification
of the involved functions f(x) and g(x) and the forcing term h(t). As the properties of
the strongly forced oscillator mentioned above are surely true for the special van-der-
Pol-type equation ( 4.2.13), the results should be exploited for investigations of other
more general equations in the sense that the emergence of a chaotic region has to be
taken into account and cannot be excluded per se. Mathematical results for the general
equation ( 4.2.12) can be found in Cartwright (1957b) and Cartwright/Reuter (1987).
In the following sections, two examples of how a forced oscillator system naturally
emerges in standard economic modelling will be presented. 59

Goodwin's Nonlinear Accelerator as a Forced Oscillator

Goodwin's nonlinear accelerator model (Goodwin (1951)) is usually quoted as a mile-

stone in the development of nonlinear business cycle theory because it represented an
early alternative to the restrictive linear multiplier-accelerator models of the Samuelson-
Hicks type. However, most textbooks 60 only deal with Goodwin's simplest case, namely

59 Another example of a forced oscillator can be found in Puu (1987), which includes a
sample of beautiful numerical plots of forced oscillators with multiple subharmonics.
6 ° Cf. Gabisch/Lorenz (1989), pp. 118ff.
156 Chapter 4

that of a piecewisely defined accelerator in different stages of the business cycle. For
the purpose of this section, Goodwin's final modification of his basic model deserves
the greatest attention because it constitutes one of the very few economic examples of
a forced oscillator system when specified appropriately.
By introducing lagged investment outlays in his nonlinear accelerator model, Good-
win (1951) finally optained the second-order, nonautonomous differential equation

c:Ofi + (c: + (1- a)O)y- cp(y) + (1- a)y = O*(t) (4.2.15)

with y as income, a as the marginal rate of consumption, c: as a constant expressing

a lag in the dynamic multiplier process, (J as the lag between the decision to invest
and the corresponding outlays, cp(y) as induced investment, and O* as the amount of
autonomous outlays at t.
First consider the case in which O*(t) = 0 Vt. Equation (4.2.15) is then an
autonomous differential equation of the so-called Rayleigh type, which can easily be
transformed into a van der Pol-type equation. Differentiate (4.2.15) with respect to
time and substitute x for y:

c:Of/ + (c: + (1- a)O)fi- cp'(y)fi + (1- a)y =0 ( 4.2.16)

or
x + A(x)x + B(x) = 0. (4.2.17)

with A(x) = ((c: + (1- a)O)- cp'(x)]f(c:O) and B(x) = (1- a)xj(c:O), i.e., B is an odd
function with respect to x = 0. It can be shown that ( 4.2.17) possesses a unique limit
cycle if A(x) is an even function with A(O) < 0 and A"(O) > 0. 61
By means of graphical integration Goodwin illustrated that the transformed equa-
tion ( 4.2.16) or ( 4.2.17) possesses a unique limit cycle which shifts in phase space if the
outlay O*(t) is altered over time. If the shifting is irregular, the resulting trajectories
of income naturally deviate from harmonic motion.
Now consider the case of nonzero forcing and suppose that the time-dependent
outlay function O*(t) is r-periodic over the business cycle, i.e., O*(t + r) = O*(t);
r > 0. Let o*(t) = O*(t)j(c:O). If O*(t) is a periodic function, o*(t) is periodic as
well, and equation ( 4.2.15) turns into a forced oscillator. Suppose for simplicity that
o*(t) has a sinusoidal form, e.g., o*(t) = asinwt; a> 0, and write A(x) in (4.2.17) as
A(x) = aA(x).
Under the assumptions regarding the coefficient functions A(x) and B(x) and the
periodicity of exogenously determined outlays, (4.2.15) is then qualitatively identical

61 Compare Section 2.3.1 on the uniqueness of limit cycles.

 4.2.3. The Forced Oscillator 157

with the forced van der Pol equation. Goodwin's nonlinear accelerator economy may
therefore possess a chaotic region.

Keynesian Demand Policy as the Source of Chaotic Motion

It can be argued that one reason for the failure of Keynesian demand policy lies in
the fact that in practice mainly discretionary, once-and-for-all policy measures are per-
formed which offset major economic variables to some degree but which are not suited
for neutralizing economic fluctuations entirely. It is therefore worthwhile to investigate
the dynamic effects of permanent hypothetical demand policies which are designed to be
strictly anticyclic. In the following it will be demonstrated that some Keynesian income
policies can be ineffective when the perception of the underlying economic dynamics
as well as the proposed time path of policy interventions are too simplistic. It will be
shown that certain policy measures in a simple Keynesian framework can lead to the
formal presence of a strongly forced oscillator such that the final outcome is sensitive
to initial conditions and the system behaves chaotically.
Consider the following thought experiment. 62 Suppose that the dynamics of an
economy are precisely determined by the following standard laws of motion: net income
reacts positively to excess demand in the goods market, i.e.,

Y = a(I(Y, r)- S(Y, r)), a> 0, (4.2.18)

with a as an adjustment coefficient, I(Y, r) as net investment with Ir < 0, [y > 0 and
the Kaldorian S-shaped form of I(Y, ·), and S(Y, r) as savings with Sy > 0 and Sr > 0.
The set of points {(Y, r) I Y = 0} constitutes the IS curve of the model.
The interest rate depends negatively on the excess demand in the bonds market
which is assumed to be proportional to excess supply in the money market, i.e.,

r=f3(L(Y,r)-M/p), (3>0, (4.2.19)

with r as the real interest rate, L(Y, r) as the liquidity preference with Ly > 0 and
Lr < 0, M as the constant nominal money supply, and p as the price level. The set of
points {(Y, r) I r = 0, p = constant} constitutes an LM curve of the model.
Finally, assume that prices change according to

p = 1(Y- Y*), 1 > 0, ( 4.2.20)

withY* as the natural level of income.

62 A longer version of the following model can be found in Lorenz (1987c).

158 Chapter 4

Summarizing, (4.2.18)-( 4.2.20) constitute the three-dimensional continuous-time

system
Y = a(I(Y,r)- S(Y,r))
r= ,B(L(Y,r)- Mfp) (4.2.21)
p = -y(Y- Y*).
Suppose that the interest rate adjusts immediately to discrepancies between the demand
and supply of money such that

r= 0 = L(Y,r)- Mfp Vt, ( 4.2.22)

and assume that ( 4.2.22) can implicitly be solved for r with

r = r(Y,p). ( 4.2.23)

It follows immediately from the assumptions on the involved LM curve that ry > 0
and rp > 0.
Substitution for r in (4.2.18) and (4.2.19) leads to the two-dimensional continuous-
time system
Y = a(I(Y, r(Y,p))- S(Y, r(Y,p)))
(4.2.24)
p = -y(Y- Y*).
Under certain assumptions the system (4.2.24) constitutes an oscillator, i.e., a dynamic
system which is able to endogenously generate fluctuations. Differentiating the income
adjustment equation with respect to time yields

( 4.2.25)

Rearranging terms and substituting for the price adjustment p leads to

Y- a(!y + Irry- Sy + Srry )Y- a(Irrp- Srrp)P = 0

( 4.2.26)
Y- a(ly + Irry- Sy + Srry )Y- a-y(Irrp- Srrp)(Y- Y*) = 0.
Let A(Y) = -a(ly + IrrY - Sy + Srry) and B(Y) = -a-y(Irrp- Srrp)(Y- Y*) such
that (4.2.26) is written as
Y + A(Y)Y + B(Y) = 0. ( 4.2.27)
In order to establish a result on the oscillation properties of (4.2.27), the following
simplifying assumptions will be made:
 4.2.3. The Forced Oscillator 159

Assumption 4.1

Ir, S,, and rp are constant.

This assumption implies that 0:1( Irrp - Srrp) < 0 V (Y, p) and B(Y) > ( < ) 0 if Y >
( <) Y*. Hence, B(Y)(Y - Y*) > 0 V Y =j; Y*. Furthermore, lim I;* B(Y)dY = oo.
Y-oo

Assumption 4.2

A(Y) is an even function of Y with respect to Y*, and A(Y) < 0 at Y*.
Furthermore, 3 Y > Y* such that A(Y) > OVY > Y and A(Y) is nondecreas-
ing VY > Y.

Assumption 4.2 implies that lim I;* A(Y)dY = oo.

Y-oo
Assumptions 4.1 and 4.2 allow the following result to be established:

Proposition 4.1

If Assumptions 4.1 and 4.2 hold true, then ( 4.2.27) has exactly one limit cycle.

Proof: With the assumed properties, equation (4.2.27) is a generalized Lienard equation
to which the Levinson/Smith theorem ( cf. Section 2.3.) on the uniqueness of limit cycles
can be applied.
The uniqueness of the limit cycle depends crucially on the symmetry properties of
the functions A(Y) and B(Y). Figure 4.31 illustrates one possible form of the function
A(Y), whose properties do not seem to allow a simple generalization of the results.

A(Y)

A(Y) as an Even Function

Figure 4.31
160 Chapter 4

Equations (4.2.18)-( 4.2.20) were postulated under the assumption that the govern-
ment does not intervene in the economic process. If ( 4.2.18)-( 4.2.20) indeed describe the
evolution of the economy precisely and if assumptions 4.1 and 4.2 hold true, i.e., if the
economy is oscillating, the government may encounter the task of stabilizing the fluctu-
ating economy. This necessitates perception of the dynamic behavior of the economy.
While it cannot be assumed reasonably that the government knows the exact model of
the economy it can nevertheless be assumed that stylized facts such as turning points
and lengths of the cycles can be detected more or less exactly in time series analyses.
Suppose that the government is approximating the observed time series in the past by
a sinusoidal motion:

Assumption 4.3

The time series of income values Y(t) observed in the past and generated by
(4.2.27) are approximated by Y(t) = Y* + asinwt with a and w chosen to fit
the observed data.

The assumption implies that the government obviously considers the evolution of income
as a process which can be perceived separately from those of other variables. It will
therefore directly intervene in the goods market in an attempt to stabilize the economy
by anticylic demand policies.
If the demand-stimulating policy follows a rule G(t) such that the impact on the
economy is described by D(t) = bG(t), the excess demand in the model becomes I-
S + D(t) and (4.2.18) becomes

Y = a(I(Y, r)- S(Y, r) + D(t)). ( 4.2.28)

Obviously, the government has to determine an optimal date t 0 for the beginning of
the program. Without precise knowledge of the underlying structure of the economy
even this seemingly simple task may be difficult. For example, suppose that t 0 is chosen
such that the (absolutely) maximum impetus occurs when the laissez-faire economy is
at a turning point. At the turning points, the possibly observable excess demands in
the goods market equal zero. Therefore, the government must be positively convinced
of the correctness of its policy because otherwise it may be tempted to withdraw from
intervention at the turning points.
Suppose that the policy is introduced at a point in time t 0 : 63

Y(to) = a(I(Y(to), r(to))- S(Y(to), r(t 0 )) + D(t 0 ))

( 4.2.29)
= a(I(Y(to), r(to))- S(Y(to), r(to)) + asinw(to- 1r)).

63 Note that - sin t = sin( t - 1r ).

 4.2.3. The Forced Oscillator 161

For example, assume that the program is started when the economy is in a downswing
phase and takes on its natural level of income, i.e., t 0 = 11':

Y(to) = a(I(Y(to), r(to))- S(Y(to), r(to)) + asinw(to- 7r))

(4.2.30)
= a(I(Y*, r(t 0 ) ) - S(Y*, r(t 0 )) +a sinw(t 0 - t 0 )),
with Y( 11') < 0. Rescale the time axis by setting t~ = 0 at t 0 such that the income
adjustment equation can be written as

Y = a(I(Y(t), r(t)) - S(Y(t), r( t)) +a sinwt); t ~ t~ = 0, (4.2.31)

with Y ( 0) and r( 0) determined appropriately.

Correct timing of the introduction of the policy requires that at tri = 0 output
Y and interest rate r are at their natural levels. Incorrect timing of the program can
therefore be considered by assuming other starting values of the variables at t~, provided
that sinwt6 = 0, i.e., that the program is initiated at tri.
The dynamics of the economy are described by the income adjustment equation
( 4.2.31 ), the adjustment equation of the price level ( 4.2.20), and equation ( 4.2.22) for
the instantaneously adjusted interest rate. Differentiating (4.2.31) with respect to time
and performing basically the same procedure as above leads to

Y + A(Y)Y + B(Y) = aacoswt, ( 4.2.32)

with A and Bas defined above.

Assumption 4.4

i) The adjustment coefficient a in (4.2.32) is greater than 1, and furthermore,

ii) the product of the coefficient a and the adjustment coefficient a is greater
than 1.

If i) holds true, ii) can easily be justified because the amplitude-controlling parameter
is surely greater than 1 in order to speak of a relevant business cycle model.
Under assumptions 4.1-4.4, equation (4.2.32) is a strongly forced oscillator of the
Lienard type. According to the results introduced in the first parts of this section, there
may be a region in phase space where the dynamics are characterized by chaotic motion.
A Keynesian policy designed as a measure for completely neutralizing the cycle may
instead lead to irregular oscillations. A political consequence of this result may consist
of a suspension of Keynesian ideas in this stylized model economy. Though the demand
policy has simply been superimposed upon the economy's self-sustained evolution with
no feedback processes between the state of the economy and government expenditure, it
162 Chapter 4

may appear to the government as if its policy is indeed affecting the economy's behavior.
However, the failure of the demand management is not due to unexpected reactions of
individuals but it is generated by the sensitive reaction of the superposition of two
separate and regular time series.

Conclusion

Forced oscillator systems constitute some of the most interesting dynamical systems with
respect to the possible complexity of the dynamic motion. Intuitively, the dynamics
of these systems are rather simple. If a dynamical system like, e.g., a pendulum, is
oscillating, and if this oscillatory motion is periodically influenced by an exogenous force,
the outcome may be unpredictable. The effect of the forcing may consist in increased
amplitudes, total damping of the oscillation, or completely irregular and permanent
motion depending on the amplitude and frequency of the exogenous disturbance.
It was demonstrated above that it is relatively easy to find economic examples
of forced oscillator systems. However, most examples can be criticized because the
necessary assumptions seem to be artificial and ad hoc. The Goodwin model turns
into a forced oscillator of the desired type only because of the additional assumption
of periodic exogenous investment outlays. Actually, the nonlinear accelerator model
therefore looses its character as an endogenous business cycle model. In the Keynesian
stabilization model periodic forcing is obtained by an assumed (though nevertheless
practically unavoidable) misperception of the actual cyclical behavior of the economy.
Similar arguments can be found in most economic examples of forced oscillator systems.
Summarizing, forced oscillator systems in economics which are able to generate
chaotic behavior usually do not represent generic economic models. The models may
however be instructive from a pedagogical point of view since they uncover the possible
complexity of higher-dimensional dynamical processes.

4.2.4. Homoclinic Orbits and Spiral-Type Attractors

As was pointed out above, no general criterion exists that allows to establish the presence
of a strange attractor in continuous-time dynamical systems. However, the typical
behavior in a chaotic system can be outlined by some refl.exions on the structure of the
invariant sets present in such dynamical systems.
The following section contains a brief presentation of the horseshoe map and its
relation to transversal homoclinic orbits. The Shil'nikov scenario and a specific analyt-
ical example is demonstrated with a simple modification of a standard business cycle
model.
 4.2.4. Homoclinic Orbits and Spiral-Type Attractors 163

Horseshoes, Homoclinic Orbits, and Complicated Invariant Sets

Chaotic dynamical systems possess complicated invariant sets. A particularly enlight-

ening example of the emergence of these complicated sets is the so-called horseshoe map
introduced by Smale {1963, 1967). 64

,--- -------- -----~ .------- ---------~

C D 1 I I
I I
I I
I I
I I
I I
I I
I I
I
I
I

C D

D-
I

-
I
I
I
I
I
I
I
A B I
A B D C I
I
A B I
~----------------~ ~--------~~--~~--~
4.32.a 4.32.b 4.32.c

The Construction of a Horsehoe

F igure 4.32

Consider a three-dimensional, continuous-time dynamical system. Assume that the

Poincare map G defined on a two-dimensional cross-section (cf. Figure 4.20.b) can be
described in the following way. 65 The unit squareS= [0, 1] x [0, 1] (cf. Figure 4.32.a)

64 For details on the following concepts compare Guckenheimer/Holmes (1983), pp.

227-267, Lanford (1983), Mees (1981), pp. 51-60, Nitecki (1971), pp. 118-158,
or Thompson/Stewart (1986), pp. 245-253. A concise collection of the relevant
concepts is contained in Grandmont (1988), pp. 82ff.
65 Of course, the map G can be interpreted as a genuine discrete-time dynamical
system. In that case it is essential that G is a so-called Ck- diffeomorphism, i.e., G
is one-to-one, onto, and G and its inverse are k-times differentiable. The Poincare
map in the present contect is a diffeomorphism by construction.
164 Chapter 4

on the cross section is transformed by the map G (and thus implicitly by the original
flow) into a new geometric object in a two-step procedure (cf. Figure 4.32.b):
• The square is horizontally contracted (compressed) by a factor a, and is vertically
stretched by a factor f3.
• The rectangle [0, a] x [0, /3] generated by this contraction and stretching is folded
such that the form of a horseshoe emerges.
Depending on the factors a and f3 two cases can be distinghuished: i) The horseshoe is
entirely contained in the area covered by the original square S (in that case the map is
either area-preserving or area-contracting), or ii) the intersection of the square and the
horseshoe is only a subset of the area covered by the horseshoe. Smale (1963) assumed
that the folded region of the horseshoe and parts of the horseshoe's legs are not mapped
to the area covered by the squareS. This means that a portion of the original square
is not mapped to itself by G, i.e., some points leave the square under the action of G.
A second iteration of the map G contracts and stretches the square in Figure
4.32.b with the two shaded vertical strips to the rectangle in Figure 4.32.c. Folding the
rectangle yields the intersection with the square S shown in the the right-most picture
in 4.32.c. The two shaded vertical strips in Figure 4.32.b are transformed to 4 vertical
strips in Figure 4.32.c. Again, parts of the two strips in 4.32. b ultimately leave the
square S. Successive iterations, i.e., G»(S), generate infinitely many strips for n --+ oo.
Formally, the set of points constituting the vertical strips is given by G»(S) n S .

-
a- 1 (SnG(S))

Figure 4.33

The two vertical strips in 4.32.b are generated by mapping only a part of the
original squareS to itself. Working backwards from 4.32.b to the original square shows
that the vertical strips correspond to two horizontal strips in S (cf. Figure 4.33), i.e.,
the horizontal strips are given by a-t (S n G(S)). The unshaded areas in the original
square are the parts of the emerging horseshoe that do not overlap with the square.
Equivalently, the four vertical strips in Figure 4.32.c are generated by mapping points
in 4 horizontal strips in the pre-image to S ( cf. Figure 4.34 ).
 4.2.4. Homoclinic Orbits and Spiral-Type Attractors 165

I II I I
1--- -------- I
I
I
I
I
I
I
I
I I I I

-
- I I I I
I I I I
r----------- I
I
I
I
I
I
I
I
I I I I
- I I I I
I It I j_

Figure 4.34

After n iterations the set of points in the horizontal strips is given by c-n(s n
Gn(S)) = Snc-n(S). In order to locate those points inS that will stay inS forever and
those that originated in S in the past, the intersection of the horizontal and vertical
strips must be considered. Figure 4.35 depicts this intersection for two forward and
backward iterations. For n -+ oo, the rectangles in Figure 4.35 shrink to points. The
emerging set of points is an example of a so-called Cantor set. 66

The Invariant Set in the Horseshoe Map

Figure 4.35

66 Compare also Section 5.2.2. and Figure 5.3 for the construction of a Cantor set.
Figures 4.32.b and 4.32.c show horizontal distance lines that correspond to the first
lines in Figure 5.3.
166 Chapter 4

Formally, the set of points in Figure 4.35 for n ---+ oo is given by

The set I represents the invariant set of the square S for the map G. Points in I
originated in I and will stay in I for n ---+ oo.
Starting at an arbitrary point in the invariant set I, successive iterations of G can
carry the initial point eventuall back to itself. It is also possible that the motion of a
point in the invariant set is completely aperiodic. Smale (1963) proved with the help of
symbolic dynamics 61 that the invariant set in the horseshoe map

• contains a countable set of periodic orbits,

• contains an uncountable set of bounded nonperiodic motions,
• contains a dense orbit, i.e., there is at least one point in I whose orbit comes
arbitrarily close to every other point in I.

The corresponding motion in the original flow is then characterized by the presence of
motion on tori and of irregularily wandering trajectories.
As was mentioned above, Smale's original horseshoe map does not possess an at-
tracting invariant set. Most points in S eventually leave the square. The map G can
then be viewed as a tool for describing transient chaos when the invariant set affects
the behavior of an arbitrary point before it finally leaves the square.
Most importantly, it can be shown that the specific features of the invariant set
of the horseshoe map arise when so-called transversal homoclinic orbits exist in the
Poincare map of a dynamical system. Consider a saddle-type fixed point x* with its
stable und unstable manifolds ws(x*) and wu(x*). If the stable und unstable manifold
intersect transversely (i.e., non-tangential) at another point p, this point is said to be
a homoclinic point. The forward and backward orbit of p is then called a transversal
homoclinic orbit. When a homoclinic point exists, then there are also infinitely many
other homoclinic points: plies on ws(x*), implying that all iterates of p lie on W"(x*)

67 Symbolic dynamics describe the evolution of a point from n = -oo ton= oo by a

sequence of symbols like 0 and 1. For example, the symbol 0 may be assigned to
points in the upper half of Figure 4.35 and the symbol 1 to points in the lower half.
A sequence ... 1001 ... then means that a point in the upper half is mapped to the
lower half in the first two iterations and returns to the upper half after the third
iteration. For the horseshoe map there exists such a sequence with positions from
-oo to oo for eve.zy point in I, and, vice versa, for every sequence there is exactly
one point in I.
 4.2.4. Homoclinic Orbits and Spiral-Type Attractors 167

A Transversal Homoclinic Orbit for a Map in R 2

Figure 4.36

as well. But p and its iterates also lie on wu(x*). Thus, every iterate of plies both on
W 8 (x*) and wu(x*), i.e., every iterate of pis a homoclinic point.
When the fixed point x* is approached on the stable manifold, more and more
intersections with the unstable manifold occur. This implies that the unstable manifold
winds in a wild manner around W 8 (x*). Equivalently, W 8 (x*) winds wildly around the
unstable manifold when x* is approached on the backward orbit ( cf. Figure 4.36).
When transversal homoclinic orbits exist, the behavior of initial points that are
not located in this orbit can be extremely complex. It follows from the Smale-Birkhoff
homoclinic theorem68 that, when such orbits are present in a map g, the invariant set
of g is topologically equivalent to the invariant set in the horseshoe map, i.e. , the above
mentioned properties of the horseshoe map apply to the map g as well.

The Sbil 'nikov Scenario

It has turned out that many dynamical systems in continuous time as well as in discrete
time (n 2:: 2), for which chaos has been established either theoretically or numerically,
possess horseshoes and transversal homoclinic orbits. However, it is usually difficult to
establish the existence of horseshoes for an arbitrary dynamical system. A theorem of
Shil'nikov provides sufficient conditions for the existence of horsehoes in the Poincare
map of a three-dimensional, continuous-time system. 69 The theorem rests on the ex-

68 Cf. Smale (1967), p. 29.

69 Cf. Guckenbeimer/Holmes (1983), pp. 319/f. or Arneodo/Coullet/Tresser (1981),
p. 574.
168 Chapter 4

A Homoclinic Orbit for a Flow in R 2

Figure 4.37

istence of regular, non-transverse homoclinic orbits ( cf. Figure 4.37 for a homoclinic
orbit in R 2 ).
Consider the following specification of a three-dimensional system:

x1 = ax1- f3x2 + P1(x1,x2,xa)

x2 = f3x1 + ax2 + P2(x1, x2, xa) (4.2.33)
xa = >.xa + Pa(xl, x2, xa).
with P;; i = 1, 2, 3, as cr - functions (1 ~ r ~ oo) vanishing together with their first
derivatives at the origin 0 = (0, 0, 0).

Theorem 4.8 ( Shil 'nikov f 0

Assume that the vector field (4.2.33) has an equilibrium x* such that
(i) the eigenvalues of x* are a± if3 and >. with lal < I>. I and f3 -=I 0;
(ii) there is a homoclinic orbit r for x*.
Then there is a perturbation y of X such that y has a homoclinic orbit r' near
r and the Poincare map of r' for y has a countable set of horseshoes.
A geometric illustration of a homoclinic orbit which is consistent with the Shil'nikov
scenario is given in Figure 4.38. After leaving the equilibrium point on the unstable

7 ° Cf. Guckenheimer/Holmes (1983), p. 319.

 4.2.4. Homoclinic Orbits and Spiral- Type At tractors 169

A Shil'nikov-type Homoclinic Orbit

Figure 4.38

manifold, a trajectory returns in an oscillating manner toward the equilibrium on the

stable manifold.
While the fulfillment of the local conditions (i) of this theorem can easily be ex-
amined, the required presence of a homoclinic orbit constitutes a major obstacle which
in most cases prevents direct application of the theorem. Fortunately, some specific dy-
namical systems are known which possess a homoclinic orbit and allow the fulfillment
of the local stability properties of the Shil'nikov theorem to be easily verified.
In a series of papers, Coullet/Tresser/ Arneodo (1979), Arneodo/Coullet/Tresser
(1981, 1982), and Tresser (1982) 71 demonstrated that the dynamical system

x+ax+x=z
(4.2.34)
i = /p.(x),

or, written as a third-order differential equation,

x· +ax+ x = /p.(x) ( 4.2.35)

with a as a constant, exhibits chaotic behavior for appropriate forms of the one-param-
eter family of functions /p.(x). For example, the specification /p. = JlX(1- x), i.e., a
logistic function, yields geometric objects that resemble the diverse Rossler attractors.
The motion is characterized by a screw-type or spiral-type structure depending on the

71 Compare also Glendinning/Sparrow (1984).

170 Chapter 4

magnitude of the parameter fL. 72 Other forms of the function /1-1 with similar non-
invertibilities lead to comparable results. 73

Spiral- Type Chaos in a Business Cycle Model with Inventories

As a very simple economic example of the emergence of a chaotic motion in three-

dimensional systems analogous to the cases studied by Arneodo et al. consider the
following modification of a macroeconomic business cycle model with inventories which
in its discrete-time formulation was first discussed by Metzler (1941 ). A continuous-
time version of the model is studied in Gandolfo (1983) 74 and will thus only be outlined
in the following.
Let Y denote the national product and assume that output adjusts according to
discrepancies between the desired and actual inventory stocks, i.e.,

Y = a(Bd(t)- B(t)), a> 0, (4.2.36)

with Bd(t) as the desired and B(t) as the actual inventory stock at t. The actual
inventory stock changes when disequilibria prevail on the goods market, i.e.,

B(t) = S(t)- I(t), (4.2.37)

with S and I as savings and investment, respectively. The desired inventory stock is
assumed to depend linearily on the expected output, ye(t), in t

k > 0, ( 4.2.38)

implying that
(4.2.39)
The expected output is determined according to a modified hypothesis of adaptive
expectations which considers not only the rate of change of current output but which

72 A geometric description of the dynamical behavior in these spiral-type attractors

can be found in Berge/Pomeau/Vidal (1986), pp. 119£.
73 For example, Arneodo et al. (1982) studied ( 4.2.35) with the piecewise-linear tent
function
1 +ax if x<O
f1-1(x) = {
1- flX if X~ 0,
with a > 0 and fl > 0 as parameters.
74 Cf. Gandolfo (1983), pp. 259ff.
 4.2.4. Homoclinic Orbits and Spiral-Type Attractors 171

also includes the changes in this rate:

( 4.2.40)

Thus, expected output changes according to

( 4.2.41)

Differentiating (4.2.36) with respect to time and substituting for iJd(t) and B(t) yields
the third-order differential equation

... akai- 1.. 1 · S(t)- I(t)

Y+ Y+-Y= , ( 4.2.42)
aka2 a2 ka2

or, abbreviated,
(4.2.43)

Gandolfo (1983) demonstrated that (4.2.43) is unstable when savings is a linear function
of output, e.g., S(t) = (1- c)Y(t)- S 0 , 1 ~ c > 0, when investment is autonomous,
i.e., I(t) = I 0 , I 0 > 0, and when AI < 0. 75

~L---~------------------~----~y
d

Savings and Investment in a Modified Metzler Model

Figure 4.39

75 Theoretically, AI can be positive or negative depending on the relative magnitudes

of a, k, and ai. However, negativity seems to be more convincing especially because
of a probably low value of a.
172 Chapter 4

0.80

0.60

0.40

0.20

0.00
.,J
'd
......... -0.20
~.
'd
-0.40

-0.60

-0.80

-1.00
- 1.20~--~--~--~--~--~--~--~--~--~--~

-0.30-0.07 0.16 0.39 0.62 0.85 1.08 1. 31 1.54- 1.77 2.00

y
At = 0.40 A2 = 0.95 (3 0.60 d 1.30

The Spiral-Type Attractor of (4.2.44); Y versus Y

Figure 4.40

The linearity of the savings and investment functions in the Metzlerian model has
been assumed in this model for technical convenience. However, there is no convincing
reason why these linear functions should constitute the only economically relevant forms.
Once the linearity assumption is abandoned, it can be shown that the modified Metzler
model has the form of (4.2.35) with a noninvertible function/,.(·).
Define Y*, Bd*, B*, S*, and I* as the equilibrium values of output, desired and
actual inventory stock, savings, and investment, respectively, and consider the deviations
from these equilibrium values, i.e., y = Y- Y* , bd = Bd- Bd*, b = B- B*, s = S- S*,
'Uld i = I - I* . Equation ( 4.2.43) then becomes

ii + Atfi + A2y = /3(s(t)- i(t)). (4.2.44)

Assume that both savings and investment are nonlinear functions of output. Possible
shapes of the functions are illustrated in Figure 4.35 where it has been assumed that
 4.2.4. Homoclinic Orbits and Spiral-Type Attractors 173

1.00

0.79

0.58

0.37
N 0. 16
••
::;-
'd -0.05
"t>,
'd - 0.26

-0.47

-0.68

-0.89
- 1 . 10 ~--~--L---~--~--~--~--~---L--~--~

-0.30-0 .07 0. 16 0.39 0.62 0.85 1.08 1.31 1.54- 1.77 2.00
y
Al = 0.4-0 A2 = 0.95 {3 = 0.60 d = 1.30

The Spiral-Type Attractor of (4.2.44); Y versus Y

Figure 4.41

two points of intersection of the savings and investment functions exist. The difference
(s(y)- i(y)) therefore describes a one-humped curve similar to the logistic function
fp.(x) = p.x(d- x) used by Arneodo et al. (1981) for the case of d = 1.

Assumption 4.5

(i) At > 0 and A2 close to unity.

(ii) f3(s p.(y)- ip.(y)) is a one-humped function fp.(Y) with a critical value
Yc > 0, the slope of which can be controlled by a single parameter p..

Under Assumption 4.5, the Metzlerian model ( 4.2.44) is nearly identical with equation
(4.2.35). The Lie derivative (the divergence) of ( 4.2.44) is negative because of At > 0. 76

76 The numerical calculation of Lyapunov exponents (cf. Section 5.2.4.) for the
174 Chapter 4

The system is therefore volume contracting and possesses an attracting invariant set.
Figures 4.40 and 4.41 show the results of a numerical investigations of ( 4.2.44) in (Y- Y)-
space and in (Y- Y)-space. The dynamic behavior of ( 4.2.44) is not essentially different
from that of (4.2.35) and it can be seen that ( 4.2.44) possesses a Shil'nikov-type structure
for the assumed values of A1 , /3, and the slope of the excess supply function. In contrast
to logistic, one-dimensional difference equations, rather flat shapes of the one-humped
curve are sufficient to encounter chaotic motion. 77
It can be expected that several other modifications of the model are possible which
still imply the emergence of a Shil'nikov-type attractor when the excess supply function
is noninvertible.
The simple example presented in the above section demonstrated that it is indeed
possible to provide an economic application which is consistent with the requirements
of the Shil'nikov scenario. However, as was pointed out by Gandolfo, economic models
which can be reduced to a third-order differential equation are really rare in standard
dynamical economics, implying that further applications of the Shil'nikov theorem will
probably be complicated. Medio (1987b) demonstrated that it is possible to prove the
fulfillment of the local Shil 'nikov conditions in a multi sector model of descriptive optimal
growth while the presence of a homoclinic orbit must be assumed.

assumed parameters yields a positive and a negative exponent in addition to the

zero exponent. Cf. Lorenz (1988b) for details.
77 In the numerical investigation of equation (4.2.35), Arneodo et al. (1982) detect
the Shil'nikov attractor for a = 0.4 and f-t < 1. Larger values of f-t lead to the
appearance of regular periodic or double-periodic attractors.
Chapter 5
Numerical Tools

The theoretical results presented above allow to establish the existence of chaotic tra-
jectories in several dynamical systems, which fulfill the assumptions of the appropriate
theorems. For example, when the difference equation is unimodal, it is possible to apply
the Li/Yorke theorem or Sarkovskii's theorem and to establish the existence of chaos (in
one of the two senses mentioned in Section 4.1). However, in many cases it may be dif-
ficult or analytically impossible to detect a period-three cycle, and for most differential
equation systems there are no theoretical results at all. Experiments show that even for
cycles of a relatively low period it may be impossible to distinguish regular time series
from completely chaotic series by simple visual inspection.
It is therefore necessary to introduce more sophisticated methods of time series
analysis into the investigation of irregular motion, and the question arises whether it is
possible to apply numerical techniques which evidence chaotic dynamics in

• statistical time series for which the underlying dynamical system (if it exists) is not
known, and in
• given dynamical systems which do not fulfill the assumptions of the standard the-
orems but which appear as good candidates for chaotic systems.

The following tools can be useful in deciding whether an actual statistical time series or
176 Chapter 5

a time series generated by a simulation of a known dynamical system is regular, chaotic,

or stochastic. 1

5.1. Spectral Analysis

If a dynamical system is given whose behavior cannot be investigated further by applying

the standard geometric or analytical methods, numerical simulations are appropriate.
The generated time series in such a simulation may exhibit simple patterns like mono-
tonic convergencies or harmonic oscillations. However, the series may also appear to be
random due either to
• periodic behavior with a long period,
• quasi-periodic behavior with many incommensurate frequencies,
• deterministic chaos, or to
• noise generated by the use of specific algorithms during the simulation. 2
Spectral analy8is has proven to be particularly useful in attempts to distinguish periodic
and quasi-periodic time series with few frequencies from random behavior (either chaotic
or true random behavior). 3
The aim of spectral analysis is dividing a given time series into different harmonic
series with different frequencies. For example, if a time series consists of two overlapping
harmonic series, spectral analysis attempts to isolate these two harmonic series and to
calculate the involved frequencies. Furthermore, spectral analysis provides information
on the contribution of each harmonic series to the overall motion, i.e., whether there
are dominating frequencies.
In the following, only an outline of the essential ingredients. of spectral analysis
will be given. 4 Assume that a time series xi; j = 1, ... , n of a single variable has been
observed at equi-distant points in time. The Fourier tran8form of the series xi is defined
as
x = _1_ ~ x ·e-(i21rjkfn) k = 1, .. . ,n, (5.1.1)
k r.;; L....t ) '
yn i=1

1 However, it must be stressed at the beginning that (abstracting from spectral anal-
ysis) the usage of these tools is in very early stages and that the progress in this
field is rapid. The following survey is therefore neither complete nor very in depth.
2 For example, algorithms for the approximation of derivatives are usually sources of
this "computer noise".
3 See, for example, the pioneering work of Granger/Hatanaka (1964) for an elaborated
introduction. Cf. Dale (1984) for applications in business cycle theory.
4 Cf. Berge et al. (1986), pp. 43/f. for a comprehensive survey of Fourier transforms
and power spectral analysis.
 5.1. Spectral Analysis 177

with i =.;::I. The inverse Fourier transform maps the Xk back to Xj with the difference
that Xj is now periodic, i.e., Xj = Xj+n:

x.- _1_ ~x- e-(i21rjk/n) k = 1, ... ,n. (5.1.2)

)-..;nL.J k '
k=l

Consider next the autocorrelation function defined as

(5.1.3)

with m as the lag between the correlated values. By applying the Fourier transform to
(5.1.3) and substituting for Xj, (5.1.3) becomes

1/Jm 1~ lxkl
_
= - L.J
2 (21rmk)
cos - - . (5.1.4)
n k=l n

The inverse of (5.1.4) is 5

_ 2
lxkl =
1~
~ ~ 1/Jmcos
(21rmk)
-n- · (5.1.5)

The function lx k 12 is thus proportional to the Fourier transform of the autocorrelation

function. The graph obtained by plotting lxk 12 versus the frequency f = (27r )/n is
called the power spectrum. 6
A power spectrum can loosely be defined as each frequency's contribution to the
overall motion of the time series. For example, if there is no periodic component in a
given series, the power spectrum will be a smooth monotonic curve. 7 If there are fre-
quencies for which the associated lxkl 2 are significantly higher than for others, spectral
analysis indicates the existence of periodic behavior. The interpretation of the peaks
differs according to the underlying time concepts.
When the basic dynamical system is formulated in continuous time, a single peak
in the power spectrum is equivalent to the existence of a single closed orbit with the

5 Cf. Berge et al. (1986), p. 47 for details.

6 In practical numerical work the Fourier transfonn is usually replaced by the Fast
Fourier transform, which (as the name suggests) is a much faster algorithm than
the original transformation.
7 Depending on the particular algorithm this curve will have different shapes. Typi-
cally, the power spectrum for nonoscillating time series is negatively sloped.
178 Chapter 5

associated frequency. Power spectra with several distinguishable pea.lis indicate the
presence of quasi-periodic behavior. The dominating and incommensurable peaks rep-
resent the basic frequencies of the motion, while minor peaks can be explained as linear
combinations of the basic frequencies. If the underlying system is discrete, a single
peak corresponds to a period-2 cycle, the emergence of two additional peaks to the left
and to the right sides of the first peak, respectively, correspond to a period-4 cycle, 7
peaks correspond to a period-S cycle, etc. If a continuum of peaks emerges8 , the power
spectrum is said to reflect broad band noise. The motion is then either purely random
or chaotic for both underlying time concepts.
Figures 5.l.a and 5.l.b represent power spectra of the logistic equation for different
values of the bifurcation parameter J.L. 9 Figure 5.l.a illustrates the power spectrum
for a value J.L < J.Lc of the bifurcation parameter. It is evident from this figure that
the logistic equation is characterized by period-doubling if J.L is sufficiently close to J.Lc·
Consequently, the power spectrum exhibits distinguishable peaks at frequencies with
equal distance. Figure 5.l.b illustrates the power spectra for J.L in the chaotic region.
Obviously, it is impossible to isolate a single frequency which dominates the other ones.

2.4 2.0

1.6 1.5

0 .8 1.0

o.o 0 .5

Q)j -0.8 ~ 0 .0
tiD
g g
.,p. - 1.6 -0.5

-2. 4 "'p. -1.0

I~'~A~~~
- 3 .2 - 1.5

-2.0

0 .0 0 . 1 0 .2 0 .3 0 .4 0 .5 0 .6 0 .7 0 .8 0 .9 1.0 o.o 0 . 1 0 .2 0 .3 0.4 0 .5 0 .6 0 .7 0 .8 0.9 1.0

freq fre q
3 .57 0 11 = 5000 m = 500 u = 3 .800 D = 5000 m = 500

5.l.a. 5.l.b.
Power Spectra of the Logistic Equation
Figure 5.1

8 It may be difficult to decide whether a continuum indeed prevails because subhar-

monics may add an unknown number of peaks to the spectrum.
9 Frequencies are measured in units of 1r in both figures.
 5.2. Dimension, Entropy, and Lyaptmov Exponents 179

While power spectra are thus particularly useful in investigating the periodic or quasi-
periodic behavior with few frequencies of higher-dimensional dynamical systems, chaotic
and random behavior cannot be discriminated with this method. The following section
presents some concepts which can provide more definite answers to the question of which
type of behavior prevails in a dynamical system or a time series.

5.2. Dimension, Entropy, and Lyapunov Exponents

The short presentation of spectral analysis has shown that traditional statistical tech-
niques fail to provide a definite answer to the question of whether a given complex time
series is generated by a random process or by deterministic laws of motion. Appropriate
concepts for distinguishing between these two sources of complex and irregular behavior
have emerged only recently, and the development of new techniques is still in progress.
The following section which outlines some of these relatively new methods and concepts
will therefore be preliminary. In addition to the empirical motivation for dealing with
those concepts, their discussion will be useful because new insights into the nature of
deterministic chaotic systems can be provided. 1 0

5.2.1. Phase Space Embedding

Of central importance to the numerical investigation of complex dynamical systems is

the notion of the embedding dimension. Suppose that a dynamical process is generated
by a deterministic set of equations like 11

x~+l = g;(xt), X E R0 , i = 1, ... ,n, (5.2.1)

and let a certain xi be the variable which attracts the attention of an observer. The
observer neither knows the structural form of (5.2.1) and its dimension n (and therefore
the values of all relevant other entries x~; if. j, in (5.2.1) ), nor can he be sure that his
measurement of the quantity x{ is correct. Denote the observed value of the variable

10 Surveys of the following topics can be found in Berge et al. (1986), pp. 144
if. and pp. 279 if., and with an overview of economic applications in Frank/
Stengos (1988b). The more technically interested reader should consult Eckmann/
Ruelle (1985), Barnett/ Chen (1988a), Brock (1986, 1987b, 1987c), and Brock/
Sayers (1988).
11 The continuous-time case can be treated analogously, cf. Guckenheimer/Holmes
(1983), pp. 280 ff. and Takens (1981).
180 Chapter 5

xi at t as x1 and let
(5.2.2)
i.e., the observed variable depends on the "true" values x!; i = 1, ... , n, but the mea-
surement of the variable 12 may imply differences between x{ and x{.
f=
The measurement procedure over time generates a time series { x{} 1 • An embed-
ding is an artificial dynamical system which is constructed from the one-dimensional
time series in the following way: consider the last element x~ in the observed time se-
ries and combine it with its m predecessors into a vector Xr
= ( x~, x~_ 1 , •• • , x~-m+ 1 ).
Perform this grouping for every element x{ in the descending order t = T, ... , 1 and
drop the remaining m - 1 first elements in the original time series because they do not
possess measured predecessors. In this way, the scalar entries in the original time series
have been rearranged into the m-dimensional vectors xf' :

-m c-i -i -i
Xr = XT, XT-1' ... 'XT-m+1
)
-m
XT-1 =
c-i -i -i
XT-1•XT-2•···•XT-m
)
(5.2.3)

with t 0 = m. Them-dimensional vector xr

is called the m-history 13 of the observation
x~. Since the first elements are dropped, the sequence of the vectors {xf'} f::to
is shorter
than the original time series and varies with the length of the history. The length m is
called the embedding dimension.
Each m-history describes a point in an m-dimensional space, the coordinates of
which are the delayed observed values in the vector xf'. The sequence {xf' }f=to
of
points will therefore form a geometric object in this space. It was proven by Takens
(1981) that this object is topologically equivalent to the appropriate object generated
by the true dynamical system (5.2.1) if 14

i) the variables xi of the true dynamical system are located on an attractor, i.e., there
are no transients,
ii) the functions g;( x) in the true dynamical system and the observation function h( x)
are smooth functions, and
iii) m > 2n - 1.

12 Brock (1986), p.170, calls the function h a measuring apparatus.

13 The relevant literature actually considers what might be called the m-future of an
observation, namely xf' = (it, Xt+t. ... , Xt+m-d· The qualitative properties are
the same for both orientations.
14 For a precise formal description of the Takens theorem compare Brock (1986).
 5.2. Dimension, Entropy, and Lyapnnov Exponents 181

If conditions i) - iii) are fulfilled, it is thus theoretically possible to reconstruct the

behavior of the (unknown) true dynamical system from a single observed time series. 15
However, as n is not known for an arbitrary observed time series, the choice of m is
vague. 16
The described m-histories of an observed time series are important in attempts to
calculate the so-called correlation dimension and the Lyapunov exponents from these
series. Before these concepts can be presented, another basic concept, namely that of
fractal dimension, must be described briefly.

5.2.2. Fractal Dimensions

Intuitively, the dimension of a geometric object is connected with an integer value. For
example, a point has dimension 0, a line has dimension 1, a circle has dimension 2,
etc., and it is difficult to imagine an object whose dimension is a noninteger number,
say 1.5. In fact, the definition of the dimension used in these examples is that of the
Euclidian dimension which is always an integer. In addition to this definition, other
kinds of dimensions exist which permit not only integers and which allow an interesting
insight into the nature of strange attractors.
Though the following concept of a dimension is interesting mainly for purely math-
ematical purposes, it is very useful in understanding different notions of dimensions.
First, consider a two-dimensional space with a single point (cf. Figure 5.2.a) and con-
struct a two-dimensional square with length c:. The number N(c:) of such squares needed
to cover this single point is obviously

N(c:) = 1,

independent of the length c:. Next, consider a set of points located on a line with length
L (cf. Figure 5.2.b). For a given c:, the minimal number of squares to cover the line
entirely is
L
N(c:) = -.
c;

15 In certain cases of low-dimensional dynamical systems this result is obvious. For

example, consider the generalized Lienard equation (2.3.2) of Section 2.3.1, in which
the variable x is defined as iJ. The ( x - y )-space is therefore equivalent to the
(y- y)-space. Berge et al. (1986), p. 77 provide the exact transformation between
(x, y, z )-coordinates and (x, x, x) coordinates for the Rossler at tractor.
16 If the underlying true dynamical system is purely random, n can be thought of as
being infinitely large. In that case, no m-history of observed values can therefore
be found which mimics the true system.
182 Chapter 5

xz xz xz

5.2.a. 5.2.b.
Illustration of the Hausdorff Dimension for the Plane
Figure 5.2

As a final example, consider a set of points located in a rectangle ABCD which covers
a surfaceS (cf. Figure 5.2.c). For a given e, the minimal number of squares necessary
to cover the rectangle is
s
N(e:) = 2·
e
The Hau~dorff dimen~ion DH is defined as 17

DH =lim lnN(e:)' (5.2.4)

.,_.o ln(l/e)

where the square used above for illustrative purposes can be replaced by hypercubes
of length e:. Applying this definition to the three examples in Figures 5.2.a-c yields
DH = 0 in the case of the single point, DH = 1 for the line, and DH = 2 for the surface
S. The Hausdorff dimension is therefore identical with the Euclidian dimension in the
case of simple geometric objects.
Consider however another object which is of central importance in the geometric
descriptions of many strange at tractors, namely the so-called Cantor ~et (cf. Figure
5.3), which is constructed in the following way: take a straight line of length L = 1,
divide it into three equal parts and cut off the middle part. The set now consists of two
separate pieces. In the next step, perform this procedure with each of the two remaining
lines, such that the two lines split into four pieces, etc.
For the different steps in the construction of the Cantor set the number N (e) of
the minimal number of lines (i.e., one-dimensional Euclidian cubes) necessary to cover

17 Actually, this is the so-called Kolmogorov capacity, but the designation Hausdorff
dimeruion has become common in the dynamical systems literature.
 5.2. Dimension, Entropy, and Lyapunov Exponents 183

The Construction of a Cantor Set

Figure 5.3

the set is obviously

c: 1 ===> N(c:) 1
c: = 1/3 ===> N(c:) = 2
c: = 1/9 ===> N(c:) = 4 (5.2.5)

c: = (1/3)m ===> N(c:) =2m.

For increasing m, i.e., decreasing c:, the Hausdorff dimension is then given as

D H = ll"m ln2m . ln2m ln2

oo
m..... ln(1/(1/3)m) = J~oo ln3m = ln3 ~ 0 ·63 • (5.2.6)

i.e., a noninteger number. If the dimension of an object is a noninteger number, the

object is said to have a fractal dimension. If the attractor of a dynamical system
possesses a fractal dimension and if this number is small, there is evidence that the
attractor is strange.
However, a fractal dimension is neither sufficient nor necessary for the existence of
a strange attractor in the sense of Definition 4.1_18 There exist attractors with fractal
dimension that are not strange. On the other hand, an attractor may be strange though
its Hausdorff dimension is an integer. 19 While the concept of the Hausdorff dimension
can be useful in illustrations of the idea of fractal dimension, other concepts are more
fruitful in practical studies mainly with respect to operationality, i.e., implementation
of appropriate algorithms and their computing speed.

18 Other definitions of strange attractors, e.g., purely geometric definitions, may dis-
solve this ambiguity.
19 For details compare Grebogi et al. (1984).
184 Chapter 5

5.2.3. Correlation Dimension

An alternative to the concept of Hausdorff dimensions that saves a lot of computing time
in numerical studies is the concept of correlation dimensions introduced by Grass berger/
Procaccia(1983). Let {xUf= 1 be an observed time series of a single variable and consider
its m-histories as defined in (5.2.3). The m-dimensional vectors xf' can be plotted in
an m-dimensional phase space. If the requirements of the Takens theorem mentioned
above are fulfilled, the generated geometric object will be topologically equivalent to
the genuine attractor of the true dynamical system.
Suppose that the attractor is chaotic and consider two points on this attractor
which are far apart in time. Due to the sensitive dependence on initial conditions,
these points are dynamically uncorrelated since arbitrarily small measurement errors in
the determination of the initial point can lead to drastically different locations of the
second point. However, as both points are located on an attractor, they may come close
together in phase space, i.e., they may be spatially correlated.
The two points xmi and xmj are said to be spatially correlated if the Euclidian
distance is less than a given radius r of an m-dimensional ball centered at one of the
two points, i.e., llxmi - xmj II < r. The spatial correlation between all points on the
attractor for a given r is measured by

1 . .
C(r,m) = lim T 2
T-oo
X [number of pairs i, j with a distance llxm•- xlllJII < r], (5.2.7)

or 20
1 T • •
C(r,m) = lim T 2 """"H(r
T-oo L...J
-llxm•- xlllJII) (5.2.8)
i,j=l
with T as the length of the series of constructed m-histories xi, II · II as the Euclidian
norm, and H as the Heaviside function

1 if y>O
H(y) ={0 otherwise.

The function C(r,m) is called the correlation integral. The correlation dimen3ion is
defined as
D e(m ) _ 1. ln C(r, m)
- 1m . (5.2.9)
r-o lnr
The calculated values of the correlation dimension are close to the Hausdorff dimension
and do not exceed it, i.e., 21
(5.2.10)
2 ° Cf. Berge et al. (1986), p. 151.
21 In fact, both concepts lead to nearly identical numerical values in the standard
examples of chaotic dynamical systems. Cf. Berge et al. (1984), p. 149.
 5.2. Dimension, Entropy, and Lyapnnov Exponents 185

Obviously, the correlation dimension can be computed more easily than the Hausdorff
dimension since counting is the essential ingredient in calculating the correlation dimen-
sion: fix a small r and count the number of points N( r) lying in a ball centered at a
xmi. Perform this procedure for every xmi and calculate C(r,m) and D 0 (m).

C(r)

Correlation Integral C(r, m) vs. Radius r

Figure 5.4

The correlation integral C(r,m) depends on xm and thus on the length m of the
m-history vectors. The question of whether and how the correlation dimension varies
with changes in m thus arises. From (5.2.9) it follows that

lnC(r, m):::::: D 0 (m)lnr, (5.2.11)

i.e., the correlation integral C( r, m) is proportional to rDc. For a given m the relation
between In C(r, m) and In r can be illustrated graphically with the correlation dimension
as the slope of the function. Figure 5.4 is called a Grassberger /Procaccia plot in the
following.
The most important point consists of the fact that the slope, i.e., the correlation
dimension, settles to a stationary value for increasing length m of the m-history vec-
tors xm when the dynamical system is deterministic, whereas the slope permanently
increases in the case of a stochastic process, i.e., a process with an infinite number of
degrees of freedom. In other words, if the dimension continues to grow with the embed-
ding dimension m, the process will be stochastic. If D 0 becomes independent of m, the
process will be deterministic. The correlation dimension therefore seems to constitute a
powerful tool for distinguishing between random and deterministic noise in an observed
time series.
186 Chapter 5

5.2.4. Lyapunov Exponents

Strange attractors are geometrically characterized by the simultaneous presence of

stretching and folding, implying that two initially close points will be projected to dif-
ferent locations in phase space. 22 The presence and interaction of stretching and folding
in a certain dynamical system can be described via the so-called Lyapunov exponents.
As this section is concerned only with attractors, it is assumed in the following that the
system is dissipative, i.e., that it contracts volume in phase space with time. 23
In order to get an intuitive idea of the meaning of Lyapunov exponents, consider a
set of initial points located inside a circle in the plane and denote its radius by r 0 ( cf.
Figure 5.5.a). When the dynamical system is dissipative, it will project the initial points
in the circle into an object with a smaller area, but possibly different shape. Let the
new shape be the ellipse in Figure 5.5. b, where the former radius r 0 has been stretched
into one direction and contracted into the other one. Denote the major and minor axes
of the ellipse as r 1 and r 2 , respectively, with r 1 = J.-II r 0 and r 2 = JJ 2 r 0 , or

ri
J.-1;=-; i=1,2. (5.2.12)
ro

After N steps, the radii ri will become ri = JJ;N r 0 , or, written as logs

(5.2.13)

Suppose that the limit

(5.2.14)

exists for the number of iterations (or time t in the continuous-time case) approaching
infinity. The numbers J.-1; in (5.2.14) are called Lyapunov numbers, while the logs of the
JJi's are called Lyapunov exponents denoted by .A; = log 2 J.-li· Obviously, there are as
many Lyapunov exponents in a dynamical system as there are phase space coordinates,
i.e., i = n. The set of all Lyapunov exponents ..\;; i = 1, ... , n; is called the Lyapunov
spectrum of a dynamical system.
The sign of the Lyapunov exponents determines whether stretching and contracting
occur in a dynamical system. If the two exponents r 1 and r 2 mentioned above have
opposite signs, the ellipsoid will be infinitely stretched for N ---t oo. However, as the

22 Compare also Section 4.2.4. for stretching, contracting, and folding in the horseshoe
map.
23 In the case of continuous-time dynamical systems, the Lie derivative ( cf Section
2.4.1.) must therefore be negative.
 5.2. Dimension, Entropy, and Lyapunov Exponents 187

scenario takes place on an attractor, the ellipsoid cannot always be stretched in the
same direction, but must be folded such that it is located in the neighborhood of the
original circle. The stretching implies that two initial points close together in the original
circle will diverge exponentially on the attractor. The Lyapunov exponents therefore
constitute a quantity for characterizing the rate of divergence of two initial points. Note
that this divergence on the attractor is a dynamical property. The folding present in
strange attractors may occasionally lead to geometrically close contacts between two
points on different trajectories.

5.5.a. 5.5.b.
Stretching and Contracting in a Dynamical System
Figure 5.5

It remains to formalize the development of the ratios ri jr 0 during the dynamical

process. Consider first the discrete-time case with an n-dimensional mapping

(5.2.15)

and two initial points x 0 and x~. Let the difference <5x 0 = x 0 - x~ be small. After the
first iteration, the difference between the two points x 1 and x~ will be

(5.2.16)

A linear approximation of the difference yields

(5.2.17)
188 Chapter 5

df(l)(x )
where dx 0 is the Jacobian matrix J:

J= (5.2.18)

After N iterations the difference between the corresponding points will be

(5.2.19)

with f(N)(x 0 ) as the Nth iterative. Linearization yields

(5.2.20)

where, by the chain rule, (df(N)(xo))/(dx) = J(N) equals the product of theN Jacobian
matrices J in (5.2.18) evaluated at x 0 •
As J(N) is ann x n matrix, it also possesses n eigenvalues. Denote the eigenvalues of
this matrix as Af and rearrange them such that A[" ~ A!j ~ ... ~ A;/. The Lyapunov
exponents .X;; i = 1, ... , n, are defined as 24

1 log 2 (A f).
.X; = lim N (5.2.21)
N-+oo

From the so-called multiplicative ergodic theorem 25 it follows that this limit exists for
almost all Xo.
As an example, consider again the logistic equation (4.1.2). The eigenvalue of
J(I) is, of course, the first derivative, and the eigenvalue of J(N) is the product of the
derivatives along the orbit {xt}f:, 1 (cf. (4.1.8) ). If the map possesses a stable fixed
point, e.g., x* = 0.6 for p = 2.5, the product of the derivatives at the fixed point is
f1 = .5N. The Lyapunov exponent is then given as .X= log2 (.5N)/N = -1, indicating
the fact that the sequence {xt} is rapidly converging to the fixed point. Table 5.1
contains the results of a simple calculation of the Lyapunov exponent for the logistic

24 Cf. Farmer et al. (1983), Guckenheimer/Holmes (1983), pp. 283ff., Eckmann/

Ruelle (1985), Wolf et al. (1985). It is also possible to use natural logarithms.
25 Cf. Eckmann/Ruelle (1985), pp. 629ff.
 5.2. Dimension, Entropy, and Lyapnnov Exponents 189

t Xt f'(xt) n!. f'(xt) >..(N)

1 .600 0.799 0.799 -.321

2 .960 3.680 2.944 .778
3 .153 2.771 8.158 1.009
4 .520 0.160 1.307 0.096

21 .262 1.899 0.178. 107 0.989

22 .774 2.195 0.392. 107 0.995

99 .221 2.225 0.598. 1030 0.999

Lyapnnov Exponents of the Logistic Map; t-t = 4

Table 5.1

map with t-t = 4, i.e., for the chaotic case. For N -+ oo, the Lyapnnov exponent is
positive and close to 1.
Figure 5.6 shows calculated values of the Lyapunov exponents for the logistic map
versus the parameter f-L· As can be seen from the figure, the exponents are negative for
values of f-L lower than the critical value f-tc ~ 3.59. In the chaotic regime, the exponents
are typically positive, but there are t-t with negative Lyapunov exponents, indicating the
presence of stable period points.
An analogous procedure for the continuous-time case leads to

1 log 2 (AT)
>..; = lim -T (5.2.22)
T-+oo

with T E R, i.e., the time step between iterations tends to zero.

The sum E; >..;; i = 1, ... , m ::::; n can be interpreted as follows: 26 The first Lya-
punov exponent measures the extent of the ellipsoid into the first direction, the sum
>.. 1 + >.. 2 measures the extent of the area defined by the first two principal axes, the
sum of the first three exponents measures the extent of the volume defined by the first
three principal axes, etc. As this section deals only with dissipative systems, the volume
contracts under successive iterations. In systems with n 2:: 2, the sum of all Lyapnnov
exponents must therefore always be negative.
The meaning of the Lyapnnov exponents can be interpreted as follows: when all
Lyapnnov exponents are negative on an attractor, the attractor is an asymptotically
stable fixed point. When one or more Lyapnnov exponents are non-negative, then at

26 Cf. Wolf (1986), p. 280.

190 Chapter 5

0
~

0
"'0

;.,
0
0
0

0
"'0
'

0
0
-
' 3. 40 3.55 3.70 3-85 4. 0 0
r

Lyapunov Exponents of the Logistic Map

Source: Wolf (1986), p. 276; r = J.L.
Figure 5.6

Dimension Asymptotic Limit Cycle Torus Chaos

Stability (Tl) (T2)

n = l (-)
n=2 (-,-) (0,-)

n=3 (-,-,-) (0, - , - ) (0, 0, - ) (+ ,0,-)

Lyapunov Exponents and Dynamical Behavior in

Continuous-Time Systems
Table 5.2

least one exponent must vanish. 27 A limit cycle must involve a -\; = 0 and thus cannot
occur in the one-dimensional case. A torus can emerge only in at least three-dimensional

27 Cf. Eckmann/Ruelle (1985), p. 632.

 5.2. Dimension, Entropy, and Lyapunov Exponents 191

phase space. As two cyclical directions are involved in a 2-torus, two of its Lyapnnov
exponents are equal to zero {the third one must be negative in a dissipative system). If
one of the exponents is positive, chaotic motion prevails. 28 This can be stated explicitly
in the alternative definition of chaotic motion:

Definition 5.1
A dissipative dynamical system is chaotic if the largest Lyapunov exponent is
positive.

The characterization of the behavior of low-dimensional continuous-time dynamical sys-

tems by means of their Lyapunov exponents is summarized in Table 5.2. Empty fields
indicate the impossibility of the appropriate dynamical behavior if the dimension n is
too low.
Recently, efficient algorithms have been constructed to estimate the entire Lya-
punov spectrum or only the largest Lyapnnov exponent. The algorithm by Wolf et al.
(1985) has emerged as the standard and constitutes a relatively easy way of calculating
the largest exponent from a time series. Brock/Dechert (1987) have demonstrated that
a theoretically ideal version of the algorithm indeed converges to the true exponents. A
modification of the algorithm of Wolf et al. can be found in Kurths/Herzel (1987).

5.2.5. Kolmogorov Entropy

It was stressed several times before that a strange attractor is characterized by a sensi-
tivity to initial conditions, i.e., two initially close points may imply completely different
trajectories. Suppose that two initial points are so close together that they cannot
be distinguished one from another by the measuring device. Provided that the mo-
tion takes place on a strange attractor, the trajectories diverge and eventually become
distinguishable as time elapses. In other words, while at the start of an experiment
information on possible differences in the initial states may not be accessible, it will be
produced as time passes. 29
An index which reflects the amount of information produced on an at tractor is the
so-called Kolmogorov entropy, which occasionally is also denoted as metric entropy or
just entropy. Technically, the number is derived as follows: partition the phase space

28 Note that chaos therefore cannot occur in a two-dimensional, continuous-time sys-

tem: with .X 1 > 0 and .X 2 necessarily equal to zero, the system would possess a
repeller instead of an at tractor. The minimum phase space dimension for a strange
attractor is thus n = 3.
29 Cf. Grassberger (1986), pp. 292 ff. for a precise formulation of the required
information to specify a trajectory.
192 Chapter 5

..
lA

.... ~ /__
~
' ~

...'-*" ~
~
"'."
~

~
~
'
)

~ ~

~----------------------------------------~Xl

A Partition of the Phase Space with Hypercubes in the Plane

Figure 5.7

into hypercubes with side lengths c: and denote the resulting n cubes by e;; i = 1, ... , n
(cf. Figure 5. 7). Consider an initial measurement x( it) and suppose that subsequent
measurements take place at fixed points in time (it + r ), (tt + 2r ), ... ( t 2 ). Denote the
joint probability30 that the trajectory starting at x(tt) will be in cube et at (tt + r),
in cube e2 at (tt + 2r ), ... , and in cube en at the final point (tz) by Pet, ... , en. The
Kolmogorov entropy is then defined as

K li~
= - e-+ t lim
2-+oo r-+
li~ -!- L
zT c
Pet, ... , en log Pet, ... , en. (5.2.23)

Equation (5.2.23) is numerically intractable when the probabilities are not known. An
approximation of the entropy K was proposed by Grassberger/Procaccia (1983b), who
related the entropy to the correlation integral presented above. Let c:) be the em (
correlation integral of a time series with embedding dimension m. It can be shown that
the expression3 t
K 2 = 11m. 1' 1 1 cm(c:) (5.2.24)
1m - og C + t ( )
m-+oo e-+0 T m c;

estimates the Kolmogorov entropy very well (K2 ~ K). It has the advantage that it
can be computed as easily as the correlation dimension.

3 ° Cf. Haken (1983a), pp. 26ff. for the notion of joint probabilities.
3t Cf. Grassberger/Procaccia (1983b), pp. 2591f. or Eckmann/Ruelle (1985), pp.
649f. The variable r represents the time lag in the measurement procedure. In the
case of a time series generated by a differential equation, a value of, e.g., r = 10
means that only evezy lOth value in the time series is considered in the calculation.
 5.2. Dimension, Entropy, and Lyaptmov Exponents 193

As the correlation integral does not change in case of a regular at tractor like a limit
cycle, i.e., cm(e) = cm+ 1(e), the entropy K 2 equals zero. If the dynamical system is
entirely random, the entropy is infinite. A chaotic system is characterized by a finite
entropy 0 < K 2 < oo, i.e., by increasing the embedding dimension the Kolmogorov
entropy approaches a finite and positive value from above.

5.2.6. Summary

The different indices described above allow to distinguish regular, chaotic, and random
behavior in a dynamical system or its reconstruction from a time series. The corre-
lation dimension provides information on the deterministic or random character of a
time series, whereas Lyapunov exponents and the Kolmogorov entropy are useful in
discriminating chaotic and regular behavior.
In some cases, the relation between the three indices can be specified numerically,
at least with respect to interacting bounds. As was mentioned above, the correlation
dimension is a lower bound to the Hausdorff dimension, i.e.,

(5.2.25)

and, in fact, both concepts provide nearly identical values in many cases.
It has further been conjectured that the Hausdorff dimension (and thus implicitly
the correlation dimension) are related to the Lyapunov exponents. For example, in the
case of a two-dimensional map with Lyapunov exponents >. 2 < 0 < >. 1 the conjecture
reads 32
(5.2.26)

The r.h.s. of (5.2.26) is also referred to as the Lyapunov dimension. 33 In some cases,
the Lyapunov dimension approximates the Hausdorff dimension fairly well.
As positive Lyapunov exponents indicate the stretching of an initial set on an
attractor in a single direction and as the Kolmogorov entropy measures the average rate
of simultaneous stretching in all directions, both indices can be related by

K ~ L positive>.;. (5.2.27)

32 Cf. Ott (1981), p. 662 or Wolf et al. (1985), p. 289.

33 The general definition of the Lyapunov dimension is DL = j + ~f- 1 >.; with j

i>.j+11
fulfilling the condition that ~{= 1 >.; > 0 and ~f~: >.; < 0.
194 Chapter 5

In some cases, ::::; can be replaced by the equation sign; equation (5.2.27) is then called
PeJin'J identity.
Table 5.3 contains the calculated values of the correlation dimension, Lyapunov
exponents, and Kolmogorov entropy for some prototype examples of chaotic dynamical
systems mentioned in the text. 34

Equation Correlation Lyapunov Kolmogorov

Type Dimension Exponents Entropy

Lorenz t 2.05 ± .01 .A1 = 2.16 ~ 0.13 (*)

.A2 = .0
.Aa = -32.4

ROssler t 2.29 ± 0.06 (*) .A1 = 0.13 ~ 0.011 (*)

.A2 = .0
.A 3 = -14.1 (*)

Henon § 1.21 ± .01 .Al = .603 0.35 ± 0.02

.A2 = -2.34

t Cf. eq. (4.2.1); s = 16.; r = 45.92; b = 4.

t Cf. eq. (4.2.2); a= 0.15; b = 0.2; c = 10.
§ Xt+l = 1 - 1.4x; + 0.3yt; Yt+l = Xt
Statistical Properties of Prototype Strange Attractors
Sources: Grassberger/Procaccia (1983 a,b), Vastano/Kostelich (1986)
Wolf et al. (1985), own calculations ( *)
Table 5.3

In applying these tools in empirical investigations of the possible presence of chaotic

motion in an actual time series, the following two-step procedure seems to be appropri-
ate:

Step 1: Calculate the correlation dimension. If De is very high, the system is

dominated by random influences and the hypothesis of the presence of
chaos should be rejected.

34 Calculations for other dynamical systems in different fields can be found, for ex-
ample, in Wolf et al. (1985), p. 289. Own calculations should be considered
preliminary because the excessive time consumption allowed only limited data sets.
 5.3. Are Economic Time Series Chaotic? 195

Step 2: If De is low, calculate the largest Lyapunov exponent and the K 2 ap-
proximation of the Kolmogorov entropy. If a positive Lyapunov exponent
can be detected and if K 2 converges to a finite positive value, it can be
concluded that chaos is present.
In addition, other tests may be necessary to confidently establish chaotic dynamics in a
time series and they will be outlined in the following section on economic applications
of the concepts described above. These tests may become necessary because all of these
concepts involve numerically vague statements. As, for example, the sample size of
the time series, the size of the embedding dimension, the radius r in the correlation
dimension or its sufficiently low value are not precisely determined, room for subjective
interpretation of the results remains in most empirical applications.

5.3. Are Economic Time Series Chaotic?

Before some recent results on possibly chaotic empirical time series are presented, it may
be appropriate to discuss whether the distinction between chaotic and random systems
is relevant to economics.
The aim of business cycle theory over the decades was to model the basic underlying
dynamics of an economy, implying regular fluctuations. Much in the spirit of the mech-
anistic worldview, the general tendency in reflexions on the cyclical behavior of major
economic time series was characterized by the attempt at isolating the regular forces in
oscillating time series and explaining them by appropriate assumptions concerning the
structure of the economy. Though nobody could really claim that the regularly oscillat-
ing linear economic systems like, for example, the multiplier-accelerator systems of the
Samuelson-Hicks type could satisfactorily picture actual time series, it was nevertheless
believed that these models could provide an example of the basic underlying economic
dynamics. As actual time series are obviously characterized by a much more irregular
behavior not only with respect to the monotonicity of cycles (i.e., they are reminiscent
of noise) but also with respect to occasional interruptions in the amplitude and the
frequency, the idea was expressed that actual business cycles may theoretically (i.e.,
abstractly) be described by regular linear systems, but that it is r.ecessary to include
stochastic exogenous influences in order to provide a more realistic picture of the cycle.
It was impressively demonstrated by Slutzky (1937) and Kalecki (1954) that it
may be impossible to distinguish between time series generated by stochastic processes
and actually observed historical time series. Furthermore, with some effort it is almost
always possible to create hypothetical time series by means of appropriately chosen
stochastic processes superimposed on linear dynamical systems which diverge only min-
imally from actual time series. Though this is a procedure which can only be executed ex
post, the recent Rational Expectations literature on business cycles has been dominated
196 Chapter 5

by the idea that linear difference or differential equations with their implicit regularity
constitute a good starting point for describing actual cycles when stochastic exogenous
influences are included which offset the regular cycles from time to time.
In linear, oscillating dynamic models the parameter regime is reasonably restricted
to the case of damped and eventually vanishing oscillations because harmonic oscillations
require specific and absolutely constant parameters. Exploding oscillations without
bounds imply the eventual disappearance of the economy. 35 Exogenous and probably
non-economic forces are thus responsible for the persistence of fluctuations. What has
been attempted to be described by an economic model is just assumed by the hypothesis
on stochastic influences in business cycle models. An economic model is an abstract
picture of a real-life phenomenon, and it is impossible and undesirable to consider all
possible forces which may influence the results of such a model. It is, however, surely
unsatisfactory when these exogenous forces determine the main qualitative properties
of a model. For example, the recent theoretical results on time series of, for example,
business cycles by Rational Expectations economists, which rely on stochastic exogenous
forces, are guided by the weltan8chauung that an isolated economy actually tends to
settle down to a stationary equilibrium constellation, and that only due to the un-
controllable exogenous forces can an economy fluctuate permanently. 36
While stochastic exogenous influences in investigations of actual cycles can surely
not be ignored, it is worthwhile to investigate whether an actually observed cycle is
characterized by chaotic nonlinear dynamics or by a linear system on which stochastic
influences are superimposed. If a real system is indeed nonlinear and chaotic, additional
information on the possible exogenous forces that may influence the dynamic behavior
of a system may be superfluous because the system behaves mainly according to its
inherent laws of motion and not according to the exogenous forces.
Recent work on empirical chaos in economics has therefore concentrated on the
question whether an arbitrary time series is generated by a stochastic linear process or
by a nonlinear process having the chaos property. Economically, the problem can be
relevant because an agent who is aware of the deterministic character of a process and
who has sufficient information on the structure of the economy might be able to calculate
the future development of the economy to some degree while another, stochastically
oriented agent may resign in face of the seemingly too complex behavior of the system.
From the practical point of view of an agent it may be rather irrelevant whether he is

35 Cf. Gabisch/Lorenz (1989), pp. 76£.

36 What has occasionally (Begg (1982)) been called a revolution, is (with respect to
the explanation of cycles) therefore basically nothing else than a new edition of
Kalecki's historical results. Furthermore, Lucas' celebrated business cycle model
(Lucas (1975)) turns into a real business cycle model only if lag structures like,
for example, the traditional accelerator assumptions of Samuelson and Hicks are
introduced.
 5.3. Are Economic Time Series Chaotic? 197

confronted with a stochastic or a chaotic system because both kinds of systems may
prevent him from making precise predictions, but from the theoretical point of view it
is highly interesting which kind of dynamic behavior prevails because it may be the task
of political institutions to eliminate possible information barriers.
When the statistical tools described above are to be applied to economic time series,
a serious problem arises. In contrast to signal measurement in laboratory experiments
where several tens of thousands of data points can easily be obtained in a reasonable time
in many cases, the shortest time unit of measurement in economics is usually a single day.
Remembering that the majority of economic time series consists of annual, quarterly,
or monthly data (with some weekly or daily data in well-organized surroundings like
financial markets) and that the history of reliable empirical research encompasses a
period of at best 80-100 years, the length of a standard time series is shorter than the
maximal value of n ~ 10, 000, and will typically consist of a few hundred (or less) data
points. The reliability of the calculated indices is therefore obviously limited.
An example of the direct application of correlation dimensions and Lyapunov ex-
ponents to macroeconomic data with a small sample size is reported in Brock (1986) in
a test for deterministic chaos in detrended quarterly US real GNP data from 1947-1985.
The Grass berger /Procaccia correlation dimension is calculated as De ~ 3.0 to 4.0 for
an embedding dimension of m = 20, and the largest Lyapunov exponent is slightly
larger than zero. With some precaution it could therefore be concluded that chaotic
motion in the GNP data cannot be excluded.
In order to uphold these findings, additional tests are desirable. An attempt to
support or to reject the results of the standard procedures described above is Brock's
residual diagnostic. 31

Theorem 5.1 Residual Diagnostics (Brock (1986))

Let {at} ~I be a deterministic chaotic time series. Fit a linear time series
model with a finite number of lags to the series, i.e.,

at +/I at-I + · · · + 'YLat-L = Ut, t = L + 1, ... ,

where Ut is the residual at timet and /I, ... , 'YL are the estimated coefficients.
Then, generically, the correlation dimension and the largest Lyapunov expo-
nent of {at} and {ut} are the same.

Brock (1986) applied this residual test to the same detrended U.S. GNP data as above.

37 The following presentation of Theorem 5.1 differs slightly from the original. Al-
though the residual test is theoretically valid only in the infinite-dimensional case,
it can serve as a discriminating tool even in low-dimensional cases.
198 Chapter 5

The autoregressive AR(2) model

Xt = 1.36Xt-1 - 0.42Xt-2 + Ut, (5.3.1)

with Xt as detrended GNP, fits the data very well, and Theorem 5.1 implies that, e.g.,
the correlation dimension of the residuals {Ut} must equal the formerly calculated value
for {xt}. However, the dimension nearly doubles for alternate values of the length of
the involved e-cubes. It follows that the presence of chaos in the US GNP data should
be excluded. 38
Another additional procedure was proposed by Scheinkman/LeBaron (1986) in the
form of the shuffie diagnostics. In contrast to a stochastic process, the (re)-constructed
attractor of a nonlinear dynamical system via m-histories of observed values possesses
a geometrically ordered form if the motion is regular or chaotic. Suppose now that the
same data points are observed, but that the time indexes are changed. This leads to
different m-histories and therefore a different form of the attractor in phase space. If
the interchange of the time indexes is arbitrary, it can be expected that the attractor
will no longer display an ordered form, and, consequently, the correlation dimension will
increase. This shufHing of the data can thus be used as a test for deterministic nonlinear
dynamics versus stochastic processes: after shufHing the data, a nonlinear system will
have a (probably substantially) higher correlation dimension, while a stochastic process
will almost always imply the same high dimension before and after the shufHing. 39
The numerical tools presented above have been applied to a variety of economic
data. The following list is only an excerpt of ongoing work. 40 Business cycle theory and
economic policy mainly deal with GNP and employment as the two macroeconomic key
variables. Therefore, it is important to know whether the observed time series of these
variables behave randomly, or a nonlinear structure is present. While Brock's results
on GNP data already suggest to reject the hypothesis of chaotic dynamics for US data,
Frank/Stengos' investigations of Canadian (Frank/ Stengos (1988a) and international
(Frank/Gencay/Stengos (1988)) GNP data support the above findings. For detrended
Canadian data the authors calculate a correlation dimension of ~ 2.4 to 4.0 for varying
embedding dimensions up to m = 20. However, the residual test nearly doubles the

38 Brock (1986) points out that this phenomenon can arise in so-called unit root pro-
cesses, i.e., processes with standard deviation of {xt} close to one: although the
process is stochastic, ordered pairs (xt,Xt-l) nearly form a line in R 2 , suggesting
some kind of ordering.
39 In addition to these two supplementary diagnostics, other procedures have recently
been proposed. Without going into further details, Brock/Dechert/Scheinkman
(1987) introduced the W -statistics, which is a family of procedures based on the
correlation dimension. Cf. also Scheinkman/LeBaron (1988).
40 Surveys of recent work can be found in Frank/Stengos (1988b) and Brock (1987c).
 5.3. Are Economic Time Series Chaotic? 199

dimension. Shuffiing does not lead to higher dimensions, as would be the case in the
presence of chaos. Instead, the dimensions of the shuffied residuals even decrease. The
average dimension of German, Italian, and U.K. data is between 6.0 and 7.0; and
the residuals do not possess significantly higher dimensions. However, shuffiing the
residuals alters the dimensions only slightly. Japanese data have a lower dimension,
which is tripled by shuffiing. In all countries, the largest Lyapunov exponents are
slightly negative. Summarizing, international GNP data do not seem to be chaotic,
though there is evidence of low-dimensional nonlinearities. Sayers (1988a,b) studied
possible nonlinearities in the unemployment rates indirectly via man-days idle to work-
stoppages. Calculations of the correlation dimension and the Lyapunov exponents and
application of the residual diagnostics to the detrended data suggested to deny the
presence of deterministic chaos but it seemed as if nonlinear structure prevails in the
senes.
One of the very few studies that unambiguously established low-order deterministic
chaos in an economic time series is due to Barnett/Chen (1988a) and has initiated some
criticism. W. Barnett has often stressed that the usual simple sum index for monetary
aggregates is "not even a first order approximation to the exact aggregation theoretic
aggregate" (Barnett/Chen (1986)), and has proposed the use of Divisia indices espe-
cially in empirical investigations of monetary aggregates. The construction of Divisia
indices relies on neoclassical macroeconomic theory and measures the flow of monetary
services as perceived by the users of these servicesY Barnett/ Chen(1988a) examined
several monetary aggregates with sample sizes of> 800 observations for the presence of
chaos. 42 For example, the correlation dimensions of the Divisia analogues of the mon-
etary aggregates M2 and M3 lie between 1.0 and 2.0 for embedding dimensions up to
m = 6. Figures 5.8.a and 5.8.b contain Grassberger-Procaccia plots of the correlation
dimensions of M2 and M3, respectively. The largest Lyapunov exponents are reported
to be slightly positive. Other indices like a simple sum index of M2 or supply-side
analogues of the Divisia-M2 index display more noise. No evidence for low-dimensional
chaos can be found in the simple sum and Divisia aggregates of Ml. Recently, Ramsey/
Sayers/ Rothman (1988) have demonstrated that the same original data set used by
Barnett/Chen (1988a) does not show evidence of chaos when the data is tranformed to
a stationary time series.
Macroeconomic time series therefore do not seem to be good candidates for de-
terministic chaos. It may be argued that statistical procedures in generating the data

41 Cf. Barnett/Hinich/Weber (1986) and Barnett/Chen (1988a) for details on Divisia

indices. The growth rates of calculated Divisa monetary indexes diverge drastically
from official monetary growth rates. As aggregate monetary data are based on
certainly reliable counting procedures, this divergence may be interpreted as a
failure of neoclassical theory in the face of empirical problems.
42 See also BarnettjChoi (1988).
 200 Chapter 5

:
~r-------------------------------,
: .
:•~------------------------------.

=
..;
:

.... IU
.
•
.. ;
• c:
• c: 0
u......
uN ~ Cl•
O 0 : .. . :
Cl •
. .. .
0 O o j

.. :
0 o o l
_g
.. :
. · .. ·
0 •• ;

0
0

. . ...
.. :
0
0

.;

0 0

·~------
•- l l . OO
- •1. 00 - l------~-
t.OO -10 . 00 ... . -~--~~~
00 -4 . 00 -1 . 0 0 •-~~--~~
- 11.00 •1 \. 0 0 ~--------
• 10 . 00 • t . OO - t . OO------~
·1 00 -t 00
log 2 e log 2 e
Case 1: DDM2 Case 2 : DDM3

5.8.a 5.8.b
Correlation Dimensions of Divisia Monetary Aggregates
Source: Barnett/Chen (1988a)
Figure 5.8

can introduce such a great amount of noise that low-order deterministic chaos has to
be rejected. On the other hand, it should not be excluded per se that particular pro-
cedures like the calculation of Divisa indices are able to generate structure in basically
stochastic time series.
The results on macroeconomic data suggest to study data on the microeconomic
level instead. At first glimpse, financial data like foreign exchange rates, stock exchange
rates, etc. indeed appear to be potentially good candidates for chaotic time series.
Scheinkman/L eBaron (1986) studied time series based on a set of more than 5000 daily
stock return rates. The correlation dimension was found to be~ 5.0 to 6.0 form= 14.
The dimension of the residuals are reported to be the same as those of the original series.
Shuffling the data significantly increases the dimension, implying t hat chaos should not
be rejected. Frank/ Stengos (1987) studied gold and silver rates of return based on
London daily prices. The correlation dimension of the daily data lies between 6.0 and
7.0 for m = 25. Shuffling yields higher dimensions for all series. The K 2 entropies
of the series are in the range of 0.15 < K 2 < 0.24, and thus indicate the presence of
deterministic chaos.
 5.4. Predictability in the Face of Chaotic Dynamics 201

The studies mentioned above deal with statistical economic time series. Empir-
ical economics is, however, not exclusively concerned with anonymous numbers like
GNP, M1, or exchange rates but also encloses experimental studies of human behavior.
Sterman (1988, 1989) and Sterman/ Mosekilde/ Larsen (1988) performed the follow-
ing laboratory experiment: Human beings (mainly economists) were confronted with a
multiplier-accelerator model of the business cycle. Their task was to manage capital
investment when the model economy was in disequilibrium. The (usually suboptimal)
behavior could subsequently be described by a specific decision rule. A final simula-
tion of the decision rule with parameters estimated from the experiment showed that
a large number of the participants ( 40%) produced unstable behavior including chaos
as measured by a positive Lyapunov exponent. While such a long-term simulation of a
decision rule ignores learning effects and the experimental data includes transient be-
havior, the laboratory experiment indicates that human behavior is much more complex
than microeconomic textbooks suggest.
Summarizing this recent empirical work on deterministic chaos in economic time
series, the following conclusions can be drawn:

• Actual economic time series differ from their analogues in the natural sciences
almost always with respect to the relatively small sample size.
• As the small sample size does not lead to reliable results, supplementary tests
are necessary in empirical economics. These additional tests can reject the chaos
hypothesis in those cases in which the standard procedures indicate the presence
of deterministic chaos.
• Chaotic motion cannot be excluded in several micro- and macroeconomic time se-
ries. It does not seem that microeconomic data like, e.g., financial markets data, are
per se better candidates for the presence of chaos. The presence of noise in official
data, the generation of structure in constructing particular indexes, or statistical
preliminaries like detrending play essential roles in the findings.
• Even when the presence of chaotic motion cannot be established, evidence of low-
dimensional nonlinearities exists in many economic time series.

5.4. Predictability in the Face of Chaotic Dynamics

At first glance, the presence of deterministic chaos seems to imply rather destructive
effects on the predictability of an actual time series or the trajectories in a theoretical
economic model: if a model has sensitive dependence on initial conditions, arbitrarily
(but finitely) precise digital computers are conceptually unable to calculate the future
evolution of the system. When prediction is impossible, economics looses a major jus-
tification for its mere existence.
202 Chapter 5

Statements like the one above contrast chaotic dynamical systems with models
constructed in the classic deterministic tradition. Compared with the regular behavior
in linear or quasi-linear dynamical systems, chaotic systems display a wild and irregular
behavior, a superficial inspection of which suggests that it does not seem to possess
structure at all. When standard prediction techniques rely on a purely deterministic
approach, it is easy to claim a general failure of forecasting procedures.
However, chaotic dynamical systems should not be compared with regular deter-
ministic systems, but with purely random systems or linear systems on which stochastic
influences are superimposed. The foregoing presentation of theoretical and empirical re-
sults on chaotic dynamics showed that the presence of structure is the essential property
of chaotic dynamical systems as compared with random series. If structure prevails, it
is possible (at least to some degree) to predict the evolution of the system. Stochastic
systems or time series can allow the future behavior to be anticipated with a (hopefully)
given probability, and it may be possible to determine a corridor for a variable's probable
amplitude. In contrast, if a system is purely deterministic and chaotic, trajectories in a
higher-dimensional system diverge exponentially, but for sufficiently small time horizons
it is possible to predict the system's evolution with an acceptable preciseness. Recently,
Farmer/Sidorowich (1987) proposed local prediction techniques for chaotic time series
which seem to be promising for short-term economic forecasting. The approach relies
on the reconstruction of the attractor with the Takens method and the search for the
nearest neighbor of a given point on the attractor. The simplest method for predicting
the next realized value consists in assigning this neighbor to the predicted value. Nu-
merical applications of this technique to different prototype equations show surprisingly
low prediction errors for short time intervals.
Although research in predicting chaotic time series is still in its infancy, the follow-
ing conclusion can already be drawn: if a time series is chaotic it may be possible to
predict the short-run evolution with a sufficient accuracy. Economics should therefore
concentrate on the detection of chaotic time series. The presence of deterministic chaos
encourages short-term predictions and should not lead to desparations in face of the
complex behavior.
The possibility of predicting a chaotic time series does not mean that standard
econometric procedures constitute worse forecasting techniques per se. In addition
to the fact that linear or completely random systems can best be treated with these
techniques, it may even be possible to approximate the short-term evolution of a chaotic
time series fairly well. However, when chaos prevails, the development of forecasting
techniques which explicitly take the uncovered structure into account is desirable.
Chapter 6
Further Topics in Nonlinear Dynamical Economics

This final chapter contains two topics in nonlinear dynamical systems theory whose
relevance is either marginal or whose future development in dynamical economics is at
least not obvious, namely the adiabatic approximation and catastrophe theory. After
the initial celebrations, it has been argued that catastrophe theory is not well-suited as
an analytical tool and that it can at best serve as a heuristic tool in preparing a theory.
Though economic examples of applications of catastrophe theory are rare and though it
does not seem to be quite clear whether future work in dynamical economics will further
elaborate on the theory, a short introduction will be presented in the following because
there is often a confusion of the qualitative differences between chaos and catastrophes.
As the basic approach of distinguishing variables according to their speeds of adjustment
is the same in catastrophe theory and the adiabatic approximation, this chapter will
start with a brief presentation of the latter one.

6.1. The Adiabatic Approximation

One of the main reasons why nonlinear dynamical systems often appear as being too
complex and unsolvable consists of the fact that several known mathematical results
are restricted to low-dimensional systems, usually to the two-dimensional case. Even
in the case of the Hop£ bifurcation theorem for continuous-time systems, it may be
analytically impossible to calculate the exact bifurcation values, although the theorem
204 Chapter 6

is conceptually designed for systems with arbitrary dimension. A dimension n = 3 is

usually the highest dimension that can be handled exclusively with analytical tools.
On the other hand, dynamical economic models, designed with the intention of
picturing actual economies more or less accurately, naturally constitute systems of di-
mension 2::: 3. It is therefore desirable to look for methods that allow for an artificial
reduction of the dimension of the investigated system when an original system is high-
dimensional.
A rather fruitful path for the latter possibility seems to be the one followed by the
interdisciplinary field of synergetics. As the name suggests, synergetics deals with the
common features inherent in dynamical systems in a variety of distinguished disciplines
such as physics, biology, and the social sciences. The emphasis is unambiguously put on
the study of qualitative changes in systems which are composed of several subsystems.
As these systems are typically multi-dimensional, a technique has proven very helpful
in reducing the dimension of the problem drastically, namely the adiabatic approxima-
tion. While this technique is mathematically valid only under certain assumptions (for
example, it fails in face of chaos) it is useful at least in the study of the occurrence of
limit cycles.
Consider an n-dimensional continuous-time differential equation system

x; = ex;f;(xt, ... ,xn), i = 1, ... n, ex; E R, (6.1.1)

with ex; as coefficients measuring the adjustment speeds of x;. Suppose that the system
can be arranged such that

and that
• !I(-) = 0 can be solved such that x 1 = j 1( x 2, .. . , xn), i.e., the value of the fastest
variable can be expressed as a function of the slower variables. In that case, the
slow variables are said to slave the fast variables, and
• this procedure can be performed for all equations except the last equation Xn =
exnfn(Xt, ... , Xn)· Substitution for x; = ];(Xi+t, ... , Xn), i-:/:- n, in the last equation
reveals that fn is a function of Xn only. The equation Xn = exn]n(xn) is said to be
the order equation of the system (6.1.1).
When Xn changes according to Xn = exnfn(xn), all other variables will follow more
or less immediately. Thus, it suffices to study the dynamical behavior of Xn, and the
original n-dimensional problem has been reduced to the study of a single differential
equation.
The adiabatic approximation can be applied if the original system (6.1.1) fulfills
the following requirements: 1

1 Compare Haken (1983a), pp. 194-200, Haken (1983b), pp. 32-36 and 187-195.
 6.2.1. Basic Ideas of Catastrophe Theory 205

• When the eigenvalues of the Jacobian of (6.1.1.) are real, most eigenvalues have to
be negative while only a few are positive. Heuristically speaking, the instability of
the system has to be weak.
• When complex eigenvalues .X = a± bi exist, it is further required that if Re Ai > 0,
then Im .Xi < Re .X; < 0, i-:/= j. The inequality has to be numerically significant.
An example of an application of the adiabatic approximation in business cycle theory
was provided by Medio (1984). By allowing disequilibria on the consumption goods mar-
kets and by introducing quasi-nonlinear (i.e., piecewise-linear) accelerators in a standard
dynamic input-output model of the form

X = Ax+ Bx, X E R n, (6.1.2),

where x denotes the vector of produced commodities, A is a flow matrix, and B is a

stock matrix, Medio was able to show that this multidimensional system may display
cyclical growth under suitable assumptions about the matrix B and the steady state
growth rate.

6.2. Catastrophe Theory

The second topic of this chapter found some interest particularly in the 1970s. Though
the label catastrophe theory suggests a discussion of disastrous events, it deals with
mathematically less spectacular behavior. Catastrophe theory constitutes an attempt
to classify bifurcation phenomena in some families of structurally stable functions. The
choice of the term catastrophe theory will become apparent when it will be demonstrated
that at singular points the state variables jump to new equilibrium values in an abrupt
(catastrophic) fashion. 2

6.2.1. Basic Ideas 3

The subject of catastrophe theory is the classification of sudden jumps - or catastrophes

- in the behavior of dynamical systems. Consider a family of one-dimensional functions
which are parameterized by an m-dimensional vector a:

V=V(x,a), xER, aERm (6.2.1)

2 Introductions to the theory are, e.g., Saunders (1980), Arnold (1984), and Zeeman
(1977), ch. 1-2. See also Thom (1977).
3 Parts of the following two sections are essentially identical with material contained
in Sections 5.2.1 and 5.2.2 in Gabiscb./Lorenz (1989).
206 Chapter 6

Let V be an analytic function such that it can be written as a polynomial of the form 4
Let
(6.2.2)

with some a; being possibly equal to zero. For a given n, the graph of the polynomial
(6.2.2) has different geometric shapes when some parameters vanish. For example, the
graph of x\ i.e., n = 4, a; = 0, i = 1, 2, 3, 4, is quite different from that of x 4 + a 1 x 3 .
Depending on the number of vanishing a's, one or several extrema of the function may
occur.
Catastrophe theory concentrates on those forms of (6.2.2) which are structurally
stable. A function like (6.2.2) with some a; being possibly equal to zero is said to be a
structurally stable function if the number and the character of the function's extrema do
not change when some of these a; change value. 5 For example, the expression h = x 4 is
not structurally stable because h = x 4 + a 1 x 3 has additional extrema. It can be shown
that for n = 4 the polynomial x 4 + a 2 x 2 + a 3 x is structurally stable. This structurally
stable form of the polynomial (6.2.2) for a given n is called the universal unfolding of
xn. The number of parameters which are necessary to stabilize xn for a given n is called
the codimension of the unfolding, e.g., x 4 has codimension two.
Catastrophe theory proves that for a codimension ~ 4 exactly seven different uni-
versal unfoldings exist, namely four unfoldings for the one-dimensional case (6.2.2) and
three unfoldings in the two-dimensional case. In other words, once the number of pa-
rameters a; is specified, only a small number of structurally stable functions exist. This
is the essential result of Thorn's famous classification theorem, in which the universal
unfoldings are labelled elementary catastrophes. Table 6.1 lists these seven simplest
universal unfoldings with codimension ~ 4 together with their pet names.
In order to demonstrate the relevance of the universal unfoldings for the behavior
of dynamical systems consider the system

z = g(z), z ERn. (6.2.3)

Assume that the variables can be divided into fast and slow variables. Let, e.g., z 1 adjust
infinitely fast to its equilibrium value. 6 In that case the other variables z2, · · · , Zn can
be interpreted as "parameters" which change very slowly. If z 1 adjusts infinitely fast to

4 Compare for the following Saunders (1980), pp. 17 if. and Poston/Stewart (1978),
pp. 92 if.
5 Note that this definition of structural stability refers to a function and not to
dynamical systems. Recall that a dynamical system is structurally stable if the
solution curves are topologically equivalent when a parameter is varied.
6 Note the similarity of this procedure with the adiabatic approximation sketched in
Section 6.1.
 6.2.1. Basic Ideas of Catastrophe Theory 207

Unfolding Codimension Pet Name

x3 + a1x 1 Fold
x 4 + a1x 2 + a2x 2 Cusp
x 5 + a 1x 3 + a2x 2 + aax 3 Swallowtail
x 6 + a 1x 4 + a2x 3 + aax 2 + a4x 4 Butterfly

x 3 - xy 2 + a1(x 2 + y 2) + a2x + aay 3 Elliptic Umbilic

x 3 + y 3 + a 1xy + a2x + aay 3 Hyperbolic Umbilic
y 4 + x 2y + a 1x 2 + a2y 2 + aax + a4y 4 Parabolic Umbilic

The Universal Unfoldings with Codimension ::::; 4

Table 6.1

its equilibrium value, the short-run dynamics are therefore described by

(6.2.4)

In the long-run, however, it cannot be assumed anymore that the parameters, i.e., the
slow variables, are constant. The long-run behavior is characterized by -# 0, i = z;
2, · · ·, n, with z1 always taking on its appropriate equilibrium value depending on the
values of the parameters.
Denote z 2 , • • ·, Zn as the vector a of parameters. (6.2.4) turns into

.
Zt = 0 = 9l ( Zt, a ) , z1 E R, "' E Rn-l
._.

or, by setting z 1 = x and m = n- 1:

X = 0 = f( x, a), x E R, a E R m.

Suppose that a function F(x, a) exists such that Fx = f(x, a) x. A dynamical

system which can be derived from such a function F( x, a) is called a gradient system. 7

7 Gradient systems are rare in economics because the so-called potentials from which
they are derived usually do not exist. The requirement of the existence of a poten-
tial can however be replaced by the weaker condition of the existence of a stable
Lyapunov function ( cf. Section 2.1).
208 Chapter 6

Catastrophe theory deals with dynamical systems x = J( x, a) for which F( x, a) is

identical with a member of the family of structurally stable universal unfoldings V(x, a).
The function f(x, a)= 0 = F.,(x, a)~ V.,(x, a) describes the equilibrium surface of the
system.
The properties of equilibrium surfaces of universal unfoldings can be described by
inspecting their singularity sets and their bifurcation sets. The singularity set S is
defined as
S = {(x, a) E R X Rn I V.,., = 0}, (6.2.5)
i.e., the set of all {x, a) for which the second derivative of the unfolding is equal to zero. 8
Geometrically, the singularity set consists of all parameter combinations for which the
equilibrium surface is tangent to the direction of the variable x. The projection of the
singularity set on the parameter space is called the bifurcation set B:

B ={a ERn IV.,.,= 0}

The dynamical behavior in the fold catastrophe as the simplest catastrophe is essentially
identical with the behavior in a continuous-time system undergoing a fold bifurcation
( cf. Section 3.1.1 ): for a 1 > 0, no equilibrium exists in the associated dynamical system.
For a1 = 0, a bifurcation occurs at x = 0, such that for a 1 < 0 a stable and an unstable
equilibrium branch exists. 9 The rest of this section will therefore deal with the second
unfolding which has been coined cusp catastrophe.
Consider the unfolding

(6.2.6)

with the equilibrium surface

(6.2.7)
and a singularity set

S: 12x2 + 2a 1 = 0. (6.2.8)
The bifurcation set can be obtained by eliminating x from M and S, yielding

B : Sa~ + 27a~ = 0. (6.2.9)

Incidentally, (6.2.9) is exactly the formula for the discriminant of the equilibrium surface
equation (6.2.7). It follows that (6.2.7) has three real roots, which either all coincide if

8 In the multi-dimensional case, the determinant of the Hessian matrix, i.e., the
matrix of second-order derivatives, must be equal to zero.
9 Cf. Gabisch/ Lorenz (1989), pp. 205£. for a short discussion.
 6.2.1. Basic Ideas of Catastrophe Theory 209

......
.......

''\
\
\
~

The Cusp Catastrophe

Figure 6.1

a 1 = a 2 = 0, or two of them coincide if a 1 and a 2 are distinct. As the unfolding (6.2.6)

is an object in the four-dimensional space (V(x ), x, a 1 , a 2 ), a geometric presentation of
the cusp catastrophe has to start with the equilibrium surface ( cf. Figure 6.1)
The term 'cusp' catastrophe is immediately obvious from the shape of the bifur-
cation set. The state variable is always located on 'top' of the equilibrium surface. It
becomes apparent that as soon as the parameters are changed in such a way that the
state variable reaches the singularity set at B ( cf. Figure 6.2) after having moved on
the upper part of the surface, the variable x will jump down to the lower part of M in
Figure 6.1.
If the long-run movement of a 2 is such that a motion on the lower part from C to
D occurs, then there will be another jump back to the upper part at D, which again
belongs to the singularity set. Considering these motions in the parameter space only,
it follows that catastrophes occur exactly every time the bifurcation set is crossed from
the inside of the area delimited by this set ( cf. Figure 6.2).
The dynamic paths of the parameters as the slow variables have been drawn under
the assumption that the parameter a 1 changes very slowly and that it is dominated
by the movement of a 2 • However, when the system is located at G, for example, then
it is also possible that a 1 moves more rapidly such that a return to the upper sheet
occurs via a route around the cusp point. In this case, no catastrophes occur because
the bifurcation set is crossed from the outside. Which route will actually be followed
depends, of course, on the adjustment speeds of the parameters.
The other different elementary catastrophes are naturally more difficult to illustrate
210 Chapter 6

,_,--....................
G _.,
/ ''
'\
\
\
~
E e....,_
.......... _ \
1
I
I
J
F

The Bifurcation Set of the Cusp Catastrophe

Figure 6.2

and require the constancy of one or more parameters in order to be presented graphically.
As most economic applications of catastrophe theory concentrate on geometric aspects,
it seem as if the higher catastrophes do not possess much relevance to economics. The
interested reader is referred to Poston/ Stewart (1978) for a detailed description of other
elementary catastrophes.
Catastrophe theory as described above deals only with bifurcations of stable fixed
points into stable and unstable ones. Without further restrictive assumptions catastro-
phe theory cannot deal with other kinds of bifurcation like the Hopf bifurcation. In
many cases it is sufficient to encounter a stable Lyapunov function in order to apply
catastrophe theory to a particular dynamical system. 10
It has been argued that catastrophe theory hardly deserves the label 'theory' at all.
Indeed, catastrophe theory provides information on the possible types of behavior in a
dynamical system, but actually cannot answer the question of what precisely happens
in a roughly specified system. The motion on the equilibrium surface depends on the
dynamics of the slow variables, and without explicit knowledge of these slow dynamics it
is impossible to say anything about the dynamics of the state variables. However, once
a dynamical system is precisely specified, it is unnecessary to refer to catastrophe theory
because the dynamical behavior can be studied more easily with the help of other tools.
Catastrophe theory should therefore be viewed as a heuristic tool in studying problems
for which little is known about the formal dynamics of the system.

1 ° Cf. Saunders (1980), pp. 68-72, for a description of the van der Pol oscillator as a
cusp catastrophe. For example, in the van der Pol oscillator presented in Section
2.3.1. a relatively strong damping is required, i.e., a high value of the coeflicient of
Y in the presentation as a second-order differential equation.
 6.2.2. The Kaldor Model in the Light of Catastrophe Theory 211

Catastrophe theory has been applied to a variety of economic problems, including

governmental behavior, stock exchange crashes, and smooth dynamics in the Malinvaud
macro-model with rationing. In the following, two economic examples of catastrophe
modelling will be presented which seem to be particularly interesting.

6.2.2. The Kaldor Model in the Light of Catastrophe Theory

Varian's extension of the Kaldor model constitutes one of the first economic applications
of catastrophe theory. Consider the three-dimensional system 11

Y = a(I(Y, K)- S(Y, W))

i< = I(Y,K)- D (6.2.10)
W= !(W*- W)

with W as 'wealth', W* as the long-run equilibrium value of wealth, 1 as the wealth

adjustment coefficient, and D as autonomous and constant depreciation. The invest-
ment function is of the well-known Kaldor type. Suppose that savings is negatively
related to wealth in such a way that not only the income-independent part of savings
but also the marginal propensity to save falls when wealth increases. If wealth is lower
than its equilibrium level, individuals have to increase their savings. Other things being
constant, the savings function moves upwards in the (S, Y)-space, implying that the
three goods market equilibria in the Kaldor model reduce to a single equilibrium (or
that no equilibrium exists). Increasing wealth therefore implies that the typical shape
of theY = 0 curve (cf. Figure 2.9) disappears for a critical value We. For W larger than
this critical value, the Y = 0 curve has a negative slope everywhere. Figure 6.3 shows
that this scenario leads to the geometry of a cusp catastrophe: imagine the equilibrium
surface as the gluing of different Y = 0 layers belonging to different values of W .12
Assume that wealth and the capital stock are relatively slowly changing variables as
compared with income. The model (6.2.10) then fulfills the requirements of catastrophe
theory, and the system always operates on top of the equilibrium surface.
Suppose that the long-run equilibrium (Y*, K*, W*) is located on the upper sheet
of the manifold (cf. point E in Figure 6.3). If a small disturbance of the equilibrium
occurs, the system returns to the equilibrium monotonically according to the dynamics
of K. However, once K is increased such that the point B is crossed, a catastrophe
occurs and income jumps down to the lower branch of Y = 0. A slow movement along

11 A longer presentation of the model can be found in Gabisch/Lorenz (1989), pp.

209ff.
12 Note the direction of an increase in Win Figure 6.3.
212 Chapter 6

A Three-Dimensional Kaldor-Model
Figure 6.3

Y = 0 is initiated until the bifurcation point

C is reached where another catastrophe
occurs and where Y jumps back to the upper branch. Eventually, Y will approach the
stable equilibrium E.
However, the shock may be extremely large, and wealth may decrease to a value
which is lower than the critical We mentioned above. Depending on the relative ad-
justment speeds of K and W, the trajectory toward the equilibrium may not be char-
acterized by a catastrophe but by a smooth adjustment path around the cusp point.
This latter path can be interpreted as reflecting a depre88ion in contrast to the former
rece88ion because the adjustment to the long-run equilibrium around the cusp point
requires more time than the path over the bifurcation set.
The catastrophe-theoretical extension of the Kaldor model made it possible to
model a phenomenon which cannot occur in the original version. Note, however, that
the above description of the possible behavior of the system has not mentioned which
dynamical behavior actually prevails. Whether the long-run equilibrium of a system is
stable or unstable and whether a trajectory moves over the bifurcation set or around
the cusp point, depends on the concrete specification of the model and the values of
the adjustment parameters. Catastrophe theory can only provide information on the
necessary structure of the dynamical system in which a certain phenomenon should be
modelled.
 6.2.3. A Catastrophe- Theoretical Approach to Stagflation 213

6.2.3. A Catastrophe-Theoretical Approach to Stagflation

Macroeconomic theory has had some problems (and still has) with a phenomenon that
was coined stagflation, i.e., the simultaneous presence of inflation and zero growth rates
of the national product, coupled with nonzero and usually high unemployment rates.
An attempt to model this phenomenon consists of modifying the original Phillips curve
by introducing additional influences like, e.g., the expected inflation rate 7re. A modified
Phillips curve
7r = J(u,1r•), fu < 0, f1r• > 0, (6.2.11)
with 1r as the actual inflation rate and u as the unemployment rate will therefore shift
in ( u, 1r )-space for different values of 1r".
The modified Phillips curve can explain the simultaneous presence of high inflation
and unemployment if inflationary expectations are high. As the stagflation phenomenon
emerged in many western countries in the mid-1970s, an increase in inflationary expec-
tations therefore should have been observed in this period as compared with the late
1960s when inflation and unemployment exhibited the traditional tradeoff. However,
such an increase could not be established empirically, and the modified Phillips curve
therefore does not constitute a satisfactory model for understanding stagflation.
An alternative way of modelling the stagflation phenomenon was provided by Wood-
cock/Davis (1979) in the form of a catastrophe-theoretical approach. Assume that actual
inflation rates change according to

(6.2.12)

Equation (6.2.12) may be thought of as a single law of motion among a set of differential
equations describing the evolution of the other variables u, 1r", etc. In the fashion of
catastrophe theory, suppose that actual inflation rates adjust to their (partial) equi-
librium values much faster than the remaining variables. If the adjustment speed is
infinitely high, ir = 0 Vt and the remaining variables can be treated as parameters.
The equation g(1r, u,1r") = 0 then describes the equilibrium surface of (6.2.12). Writing
g(·) = 0 explicitly as 1r = f(u, 1r") yields the same form as in (6.2.11), i.e., the modified
Phillips curve.
This is a purely formal presentation, which only indicates the possible derivation
of the Phillips curve from a dynamical system. However, the catastrophe-theoretic el-
ements introduced above suggest that the equilibrium surface may have a complicated
shape. In fact, Woodcock/Davis proposed a cusp-like equilibrium surface with a folding
for high values of expected inflation rates ( cf. Figure 6.4 ). Suppose that an economy
is located at an initial point A on the upper sheet of the surface. Whether or not the
economy moves to different locations on the surface depends on the motion of the slow
variables (parameters) u and 1r". Assume that the unemployment rate can directly be
214 Chapter 6

The Woodcock/Davis Stagflation Model

Figure 6.4

influenced by fiscal policy. There are surely multiple determinants of expected infla-
tion, but it is possible that the government and monetary authorities can manipulate
expectations to some degree.
If the government attempts to lower the high inflation rate at A by means of
expenditure cuts, how fast the economy reaches a location on the lower sheet of the
equilibrium surface depends on the change of the expected inflation rate. If expectations
do not change and if expenditure cuts are large, the economy moves along A-C-D
and experiences a catastrophe at C, such that the inflation rate drops more or less
immediately. This situation may be considered unrealistic because drastic decreases in
the inflation rate are typically unobservable.
Assume therefore that governmental and monetary authorities succeed in lowering
the expected inflation rate while the economy is still characterized by high actual rates.
Governmental expenditure cuts will then imply a motion along A-E-F if inflationary
expectations decline immediately, or along A-B-E-F if expectation begin to decrease
with a time lag.
The latter way around the cusp point requires more time to achieve the goal of a
low inflation rate than the fast way over the bifurcation set at F. For a considerable time
interval rising unemployment rates go hand in hand with an only gradually decreasing
inflation rate. Woodcock/Davis therefore claimed that motions around the cusp point
are proper descriptions of the stagflation phenomenon.
The economic meaning of this scenario can be questioned. The change of the
 6.2.3. A Catastrophe-Theoretical Approach to Stagflation 215

expected inflation rate affects the results in a crucial way but the model does not explain
the determinants of expected inflation. Furthermore, as the slow motion is generated by
governmental expenditure cuts, the government may abandon the anti-inflation program
because results are not observable within a reasonable time interval.

P. p P. p

r.._
I '

'----------- - -- · - - - - t - - ------------.. (

6.5.a. Cusp Model 6.5. b. Linear Model

Actual U.S. Inflation Rates 6:66- 6:83 and Estimates
Source: Fischer/Jammernegg (1986), p.16
Figure 6.5

While this model is therefore not completely convincing from a theoretical point
of view, it has turned out that this catastrophe-theoretic approach to the modified
Phillips curve may fit observable data better than a traditional linear approach. Fis-
cher/Jammernegg (1986) studied US data for the period 1966-1983 and found that an
appropriately modified, discrete version of the Woodcock/Davis approach to stagflation
is superior to the standard investigation of the equation

1f't =a+ b1r~ + CUt-1• (6.2.13)

Figures 6.5.a-b show the actual inflation rates (solid lines) and the estimated inflation
rates (dashed lines) for the cusp model (Figure 6.5.a) and the linear model (Figure
6.5.b). Obviously, the model inspired by catastrophe theory fits the actual data much
better, particularly with respect to peaks in the inflation rate.
Chapter 7

Concluding Remarks

The foregoing presentation has, hopefully, made it evident that dynamical economics can
be enriched by incorporating recent developments in the theory of nonlinear dynamical
systems. However, a few final remarks seem to be in order. The general tendency in
all mathematical theorems and economic applications presented in this short survey of
nonlinear dynamics is that even the simplest dynamical systems may involve intuitively
unexpected phenomena or highly complicated motions of the state variables. While
traditional investigations of an evolving economy (especially in business cycle theory)
have concentrated on regularity aspects, and while recent revivals of (new)-classical
macroeconomics scroll the recognized irregularities back to the noneconomic exogenous
world, nonlinear dynamical systems allow for an entirely new theoretical attitude toward
an understanding of cyclical motion which must not necessarily be irregular or chaotic.
By an appropriate choice of nonlinearities it is almost always possible to model a desired
dynamical phenomenon which is believed to prevail in reality.
It can be argued that the subject of economic theorizing is not the search for
complex dynamics in simple deterministic systems, but instead the abstraction from
unnessessary complications and the search for simple dynamics in complicated systems.
This is the same philosophy that justifies partial theorizing or highly aggregated macroe-
conomics. The procedure can imply useful results if an economy (at least in tendency)
 Concluding Remarks 217

follows these simplified rules. While abstraction and simplification dominate classroom
economics for good reason, professional economists like forecasters and advisers have to
modify the basic models because reality obviously cannot be grasped by, e.g., simple
IS-LM models. The standard procedure in constructing forecasting models consists
in expanding the basic model by introducing new variables, structural and behavioral
equations, and stochastic exogenous influences. Although most parts of large economic
models are simply structured ingredients, the models in their entities are nevertheless
highly complex systems whose behavior might be unpredictable.
If nonlinear dynamical economics can teach a lesson to traditional theorizing in
economic dynamics then it should run along the following lines: many basic statements
in dynamical economics are derived from the investigation of linear or nearly-linear dy-
namical systems. These statements have occasionally amounted to quasi-axioms in the
sense that the results derived from linear models have paradigmatically been taken for
granted in general cases which may involve nonlinearities. It has been attempted to
demonstrate above that the introduction of numerically slight nonlinearities may some-
times drastically change the dynamic behavior of a standard model. For example, a
competitive economy may no longer be characterized by the usual asymptotical stabil-
ity of its equilibrium, but may instead exhibit periodic orbits, quasiperiodic behavior,
or even chaotic motion. Thus, the main contribution of the recent developments in
dynamical systems theory to economic theory may consist of a more sensitive attitude
toward the role of nonlinearties in economics. A model which exhibits simple regular
behavior in its linear version may perform completely different once it is reformulated
in order to include nonlinear aspects.
As the section on the empirical relevance of chaotic motion has demonstrated, it is
not easy to establish the existence of deterministic chaos in an actual time series, but
there do exist examples of chaotic economic time series. Nevertheless, the results still
leave a suspicion about the involved statistics. An economy, as it is understood by the
profession, is not an isolated system, acting without interference from other abstracted
subsystems of the society. Thus, influences from other subsystems can never be avoided;
they appear in a model in the form of noise, fluctuations, and exogenous shocks. Eco-
nomics will therefore particularly gain from recent attempts to understand noisy chaos,
i.e., deterministic complex motion superimposed or initiated by noisy exogenous influ-
ences.
Economic theory is always abstracting. It must necessarily abstract from the num-
ber of individual units in an economy, from qualitative differences between goods and
services, from individual motivations to act in a certain way, etc., in order to derive
any results at all. Even if a theoretical economic model fits the world fairly well in a
numerical examination, this does not imply that the model is a perfect picture of the
real life. If a linear model with stochastic ingredients happens to fit chaotic data suffi-
ciently well, it can be justified to use such a model in describing reality. Alternatively, a
218 Concluding Remarks

chaotic dynamical model can be useful even if the observed time series are not chaotic.
As complex phenomena like actual economic time series can be modelled more easily
in nonlinear systems, these models seem to possess an advantage over the traditional
linear approach.
The dynamical phenomena presented in this book like local bifurcations to several
fixed points or to closed orbits, the existence and uniqueness of limit cycles, or the
chaos property allow one to model an empirical observation with relative ease and may
contribute to a better understanding of reality. Nonlinear dynamics may be particularly
useful in subdisciplines of economic dynamics which still lack an explicit formal presen-
tation. Recent formal work on evolutionary economics and innovation 13 constitute a
major step in understanding the long-term behavior of an economy. It may turn out
that nonlinear dynamics are not especially relevant in traditional economic theory, but
in fields still to be elaborated upon. At the least, these nonlinear phenomena, which are
obviously not too exotic, may serve as an instrument in moving beyond the restricted
concentration on linear dynamical systems which was typical for the mechanistic world-
view outlined in Chapter 1. However, the fact that a model of competitive processes
or of macroeconomic business cycles exhibits strange dynamics does in and of itself not
imply that reality is indeed characterized by exactly these dynamics. On the contrary,
it is probable that actual economic time series are governed by an interaction of imma-
nent nonlinear structures, stochastic noise, and exogenous shocks whose overall effect
can never be estimated with precision. The contribution nonlinear dynamical economics
has made to economic theory over the last decade should be viewed as a provision of
new and additional arguments why an estimation of the structure and the dynamical
behavior of an economy can be doomed to imperfection.
In a somewhat speculative manner, it can be argued that chaos is an all-embracing
principle of life. When a stable stationary point is identified with dead matter (e.g.,
with inactive Schumpeterian innovators), then it is tempting to identify a vital organism
with the opposite extreme, a chaotic state. In fact, conjectures exist that, for example,
brain waves are chaotic. Farmer summarizes these ideas in the parable: 14

Human beings have many of the properties of metastable chaotic solitary waves. (I
say metastable because all of us eventually die and become fixed points.) Old age
might be defined as the onset of limit cycle behavior. May your chaos be always of
high dimension.

It is surely too early to declare that chaos is the essential characteristic of economic
life. However, the recent empirical research has uncovered the dominating presence of

13 Cf. Silverberg (1988).

14 Farmer (1982b), p. 244
 Concluding Remarks 219

nonlinearities in actual economic time series, implying that economic life is almost al-
ways characterized by complicated (though not necessarily chaotic) processes. It seems
as if the harmonic attitude toward life typical in the linear and mechanistic worldview
can finally be rejected on the grounds of the current findings in many different sci-
entific disciplines. Once it has been accepted that the linear worldview is an artifial
and paradigmatically defected construction, complex dynamics will not be viewed as
a destructive contribution to established truth anymore, but will be considered as a
promising concept in understanding real life phenomena.
These ideas and this book should therefore be concluded with a bonmot by Hermann
Haken, namely 15

... {a) higher degree of order does not necessarily imply a higher content of meaning.

15 Haken (1982), p. 2.
References

Abraham, R.H./Marsden, J.E. (1978): Foundations of Mechanics. Reading, MA:

Benjamin/ Cummings.
Abraham, R.H./Scott, K.A. (1985): Chaostrophes of Forced Vander Pol Systems.
In: Fischer, P./ Smith, W.R. (eds.): Chaos, Fractals, and Dynamics. New
York-Basel: Marcel Dekker Inc.
Abraham, R.H./Shaw, C.D. (1983): Dynamics, the Geometry of Behavior. Part I
and II. Santa Cruz: Aerial.
Allen, R.G.D. (1963): Mathematical Economics. London: MacMillan.
Allen, R.G.D. (1967): Macroeconomic Theory. London: MacMillan.
Alexander, J .C./Yorke, J .A. (1978): Global Bifurcation of Periodic Orbits. Amer-
ican Journal of Mathematics 100, pp. 263-292.
Andronov, A.A./Chaikin, C.E. (1949): Theory of Oscillations. Princeton: Prince-
ton University Press.
Arneodo, A./Coullet, P./Tresser, C. (1981): Possible New Strange Attractors with
Spiral Structure. Communications in Mathematical Physics 79, pp. 573-579.
Arneodo, A./Coullet, P./Tresser, C. (1982): Oscillations with Chaotic Behavior:
An Illustration of a Theorem by Shil'nikov. Journal of Statistical Physics 27, pp.
171-182.
 References 221

Arnold, V.I. (1973): Ordinary Differential Equations. Cambridge, MA: The MIT
Press.
Arnold, V.I. (1982): Geometrical Methods in the Theory of Ordinary Differential
Equations. Berlin-Heidelberg-New York: Springer.
Arnold, V.I. (1984): Catastrophe Theory. Berlin-Heidelberg-New York: Springer.
Arrow, K.J.f Hahn, F.H. (1971): General Competitive Analysis. San Francisco:
Holden-Day.
Arrowsmith, D.K./Place, C.M. (1982): Ordinary Differential Equations. London-
New York: Chapman and Hall.
Barnett, W.A./ Chen, P. (1986): Economic Theory as a Generator of Measurable
Attractors. Extrait de Mondes en Developpement 54-55, pp. 209-224.
Barnett, W.A./Chen, P. (1988a): The Aggregation-Theoretic Monetary Aggregates
are Chaotic and have Strange Attractors: An Econometric Application of Mathe-
matical Chaos. In: Barnett, W.A./Berndt, E.R./White, H. (eds.): Dynamic
Econometric Modeling. Cambridge: Cambridge University Press.
Barnett, W.A./ Chen, P. (1988b): Deterministic Chaos and Fractal Attractors as
Tools for Nonparametric Dynamical Inferences. Mathematical Computing and
Modelling 10, pp. 275-296.
Barnett, W.A./ Choi, S. (1988): A Comparison Between the Conventional Econo-
metric Approach to Structural Inference and the Nonparametric Chaotic Attractor
Approach. In: Barnett, W.A./Geweke, J.fShell, K. (eds.): Economic Com-
plexity: Chaos, Sunspots, Bubbles, and Nonlinearity. Cambridge University Press:
Forthcoming.
Barnett, W.A./ Hinich, M.J.f Weber, W.E (1986): The Regulatory Wedge be-
tween the Demand-Side and Supply-Side Aggregation Theoretic Monetary Aggre-
gates. Journal of Econometrics 99, pp. 165-185.
Baumol, W.J. (1970): Economic Dynamics. 3rd ed., New York: MacMillan.
Baumol, W.J. (1987): The Chaos Phenomenon: A Nightmare for Forecasters. LSE
Quarterly 1, pp. 99-114.
Baumol, W.J.fBenhabib, J. (1989): Chaos: Significance, Mechanism, and Economic
Applications. Journal of Economic Perspective 9, pp. 77-105.
Begg, D.K.H. (1982): The Rational Expectations Revolution in Macroeconomics. Bal-
timore: John Hopkins Press.
Begg, D.K.H. (1983): Rational Expectations and Bond Pricing: Modelling the Term
Structure with and without Certainty Equivalence. Economic Journal 94, Suppl.,
pp. 45-58.
222 References

Bellman, R. (1957): Dynamic Programming. Princeton University Press.

Benassy, J.P. (1984): A Non-Walrasian Model of the Business Cycle. Journal of
Economic Behavior and Organization 5, pp. 77-89.

Benhabib, J .f Day, R.H. (1980): Erratic Accumulation. Economics Letters 6, pp.

113-117.
Benhabib, J.fDay, R.H. (1981): Rational Choice and Erratic Behaviour. Review of
Economic Studies 48, pp. 459-471.

Benhabib, J.f Day, R.H. (1982): A Characterization of Erratic Dynamics in the

Overlapping Generations Model. Journal of Economic Dynamics and Control 4,
pp. 37-55.
Benhabib, J.fMiyao, T. (1981): Some New Results on the Dynamics of the Gener-
alized Tobin Model. International Economic Review 22, pp. 589-596.
Benhabib, J .f Nishimura, K. (1979): The Hopf Bifurcation and the Existence of
Closed Orbits in Multisector Models of Optimal Economic Growth. Journal of
Economic Theory 21, pp. 421-444.
Benhabib, J.fNishimura, K. (1985): Competitive Equilibrium Cycles. Journal of
Economic Theory 95, pp. 284-306.

Berge, P.fPomeau, Y./Vidal, C. (1986): Order within Chaos. New York: Wiley.
Blackwell, D. (1962): Discrete Dynamic Programming. Annals of Mathematical
Statistics 99, pp. 719-726.

Blad, M.C. (1981): Exchange of Stability in a Disequilibrium Model. Journal of

Mathematical Economics 8, pp. 121-145.

Blatt, J .M. (1978): On the Econometric Approach to Business Cycle Analysis. Oxford
Economic Papers 90, pp. 292-300.
Blatt, J.M. (1980): On the Frisch Model of Business Cycles. Oxford Economic Papers
92, pp. 467-479.
Blatt, J .M. (1983): Dynamic Economic Systems - A Post-Keynesian Approach. Ar-
monk: M.E.Sharpe.
Blaug, M. (1979): Economic Theory in Retrospect. 3rd ed., Cambridge University
Press.
Boldrin, M. (1984): Applying Bifurcation Theory: Some Simple Results on Keynesian
Business Cycles. DP 8403 University of Venice.
Boldrin, M.f Montrucchio, L. (1986): On the Indeterminacy of Capital Accumula-
tion Paths. Journal of Economic Theory 40, pp. 26-39.
 References 223

Boldrin, M./ Montrucchio, L. (1988): Acyclicity and Stability for Intertermporal

Optimization Models. International Economic Review 29, pp. 137-146.

Boyce, W.E./DiPrima, R.L. (1977): Elementary Differential Equations and Bound-

ary Value Problems. 3rd ed., New York: Wiley.

Boyd, 1./ Blatt, J.M. (1988): Investment Confidence and Business Cycles. Berlin-
Heidelberg-New York: Springer.

Brock, W.A. (1986): Distinguishing Random and Deterministic Systems: Abridged

Version. Journal of Economic Theory 40, pp. 168-195.
Brock, W.A. (1987a): Nonlinearity in Finance and Economics. Mimeo. University of
Wisconsin.
Brock, W.A. (1987b): Nonlinearity and Complex Dynamics in Economics and Fi-
nance. In: Pines, D. (ed. ): The Economy as an Evolving Complex System.
Forthcoming.

Brock, W.A. (1987c): Introduction to Chaos and Other Aspects of Nonlinearity.

Mimeo. University of Wisconsin.
Brock, W.A. (1988a): Chaos and Complexity in Economic and Financial Science.
Mimeo. University of Wisconsin.
Brock, W.A. (1988b ): Hicksian Nonlinearity. Mimeo. University of Wisconson.
Brock, W.A./ Dechert, W.D. (1988): Theorems on Distinguishing Deterministic
from Random Systems. In: Barnett, W.A./Berndt, E.R./White, H. (eds.):
Dynamic Econometric Modeling, pp. 247-265. Cambridge: Cambridge University
Press.

Brock, W.A./Dechert, W.D./Scheinkman, J.A. (1987): A Test for Independance

based on the Correlation Dimension. Mimeo. University of Wisconsin.

Brock, W.A./ Sayers, C.L. (1988): Is the Business Cycle Characterized by Deter-
ministic Chaos? Journal of Monetary Economics 22, pp. 71-90.

Brock, W.A./ Scheinkman, J.A. (1978): On the Long-Run Behavior of a Com-

petitive Firm. In: Schwodiauer, G. (ed. ): Equilibrium and Disequilibrium in
Economic Theory, pp. 397-411. Dordrecht: D. Reidel.

Cartwright, M.L./Littlewood, J.E. (1945): On Non-Linear Differential Equations

of the Second Order: I. The Equation fj- k(1 - y 2 )y + y = b)..k cos(>.t +a); k
Large. Journal of the London Mathematical Society 20, pp. 180-189.

Cartwright, M.L./ Reuter, G.E.H. (1987): On Periodic Solutions of Van der Pols
Equation with Sinosoidal Forcing Term and Large Parameter. Journal of the
London Mathematical Society 96, pp. 102-114.
224 References

Chang, W.W./ Smyth, D.J. (1971): The Existence and Persistence of Cycles in
a Non-Linear Model: Kaldor's 1940 Model Re-examined. Review of Economic
Studies 98, pp. 37-44.
Chen, P. (1988a): Empirical and Theoretical Evidence of Economic Chaos. System
Dynamics Review 4, pp. 81-108.
Chen, P. (1988b ): Multi periodicity and Irregularity in Growth Cycles: A Continuous
Model of Monetary Attractors. Mathematical Computing and Modelling 10, pp.
647-660.
Chiarella, C. (1986): The Elements of a Nonlinear Theory of Economic Dynamics.
Ph.D. Thesis, University of New South Wales.
Clark, C.W. {1976): Mathematical Bioeconomics. New York: John Wiley.
Coddington, E.A./Levinson, N. {1955): Theory of Ordinary Differential Equations.
New York: MacGraw-Hill.
Collet, P.j Eckmann, J.-P. (1980): Iterated Maps on the Interval as Dynamical
Systems. Basel-Boston: Birkhaeuser.
Coullet, P./Tresser, C./ Arneodo, A. (1979): Transition to Stochasticity for a Class
of Forced Oscillators. Physics Letters 72A, pp. 268-270.
Crutchfield, J.P./ Farmer, J.D./ Packard, N.H./ Shaw, R.S. {1986): Chaos.
Scientific American, Vol. 255, 6, pp. 46-57.
Cugno, F./ Montrucchio, L. (1982a): Stability and Instability in a Two Dimen-
sional Dynamical System: a Mathematical Approach to Kaldor's Theory of the
Trade Cycle. In: Szegre, G.P. (ed.): New Quantitative Techniques for Economic
Analysis, New York: Academic Press, pp. 265-278.
Cugno, F./Montrucchio, L. {1982b): Cyclical Growth and Inflation: a Qualitative
Approach to Goodwin's Model with Money Prices. Economic Notes 11, pp. 93-
107.
Cugno, F./ Montrucchio, L. (1984): Some New Techniques for Modelling Non-
Linear Economic Fluctuations: A Brief Survey. In: Goodwin, R.M./Kriiger,
M./Vercelli, A. (eds.): Nonlinear Models of Fluctuating Growth, pp. 146-165.
Berlin-Heidelberg-New York: Springer.
Dale, C. (1984 ): A Search for Business Cycles with Spectral Analysis. American
Statistical Association 1984 Proceedings, pp. 267-272.
Dana, R.A./Malgrange, P. (1984): The Dynamics of a Discrete Version of a Growth
Cycle Model. In: Ancot, J.P. (ed. ): Analysing the Structure of Economic Models.
The Hague: Martinus Nijhoff, pp. 205 -222.
Day, R.H. (1982): Irregular Growth Cycles. American Economic Review 72, pp. 406-
414.
 References 225

Day, R.H. (1983): The Emergence of Chaos from Classical Economic Growth. Quar-
terly Journal of Economics 98, pp. 201-213.
Day, R.H. (1984): Disequilibrium Economic Dynamics. Journal of Economic Be-
haviour and Organisation 5, pp. 57-76.
Day, R.H . (1986): Unscrambling the Concept of Chaos Through Thick and Thin:
Reply. Quarterly Journal of Economics, 101, pp. 425-426.
Day, R.H./Kim, K.-H. (1987): A Note on Non-Periodic Demoeconomic Fluctuations
with Positive Measure. Economics Letters £9, pp. 251-256.
Day, R.H./Shafer, W. (1986): Keynesian Chaos. Journal of Macroeconomics 7, pp.
277-95.
De Haggis, H.F. (1952): Dynamical Systems with Stable Structures. In: Lefschetz,
S. (ed.): Contribution to the Theory of Non-Linear Oscillations. Vol. II., pp.
37-59, Princeton University Press.
Debreu, G. (1959): Theory of Value. New Haven-London: Yale University Press.
Debreu, G. (1986): Theoretic Models: Mathematical Form and Economic Content.
Econometrica 54, pp. 1259-1270.
Dendrinos, D.S. (1985): Turbulence and Fundamental Urban/Regional Dynamics.
Mimeo. University of Kansas.
Dendrinos, D.S. (1986): On the Incongruous Spatial Employment Dynamics. In:
Nijkamp, P. (ed.) Technological Change, Employment and Spatial Dynamics.
Berlin-Heidelberg-New York: Springer.
Deneckere, R./Pelikan, S. (1986): Competititve Chaos. Journal of Economic Theory
40, pp. 13-25.
Dernburg, T.F./Dernburg, J.D. (1969): Macroeconomic Analysis. Reading, MA:
Addison-Wesley.
Desai, M. (1973): Growth Cycles and Inflation in a Model of the Class Struggle.
Journal of Economic Theory 6, pp. 527-545.
Devaney, R.L. (1986): An Introduction to Chaotic Dynamical Systems. Menlo Park:
Benjamin/ Cummings.
Diamond, P. (1976): Chaotic Behaviour of Systems of Difference Equations. Interna-
tional Journal of Systems Science 7, pp. 953-956.
Eckmann, J.-P. (1981): Roads to Turbulence in Dissipative Dynamical Systems. Re-
views of Modern Physics 59, pp. 643-654.
Eckmann, J.-P./Ruelle, D. (1985): Ergodic Theory of Chaos and Strange Attractors.
Reviews of Modern Physics 57, pp. 617-656.
226 References

Farmer, J.D. (1982a): Chaotic Attractors of an Infinite-Dimensional Dynamical Sys-

tem. Physica 4D, pp. 366-393.
Farmer, J.D. (1982b): Dimension, Fractal Measures, and Chaotic Dynamics. In:
Haken, H. (ed. ): Evolution of Order and Chaos in Physics, Chemistry and Biol-
ogy, pp. 228-246. Berlin-Heidelberg-New York: Springer.
Farmer, J.D./ Ott, E./Yorke, J.A. (1983): The Dimension of Chaotic Attractors.
Physica 7D, pp. 153-180.
Farmer, J.D.jSidorowich, J.J. {1987): Predicting Chaotic Time Series. Mimeo, Los
Alamos National Laboratory.
Farmer, R.E.A. (1986): Deficits and Cycles. Journal of Economic Theory 40, pp.
77-88.
Feichtinger, G./ Sorger, G. (1986): Optimal Oscillations in Control Models: How
Can Constant Demand Lead to Cyclical Production? Operations Research Letters
5, pp. 277-281.
Feigenbaum, M. (1978): Quantitative Universality for a Class of Non-Linear Trans-
formations. Journal of Statistical Physics 19, pp. 25-52, and 21, pp. 669-706.
Fischer, E.O./ Jammernegg, W. (1986): Empirical Investigation of a Catastrophe
Extension of the Phillips-curve. Review of Economics and Statistics, pp. 9-17.
Fisher, I. {1961): Mathematical Investigations in the Theory of Value and Prices. New
York: Augustus M. Kelley.
Flaschel, P. {1984): Some Stability Properties of Goodwin's Growth Cycle. A Critical
Elaboration. Zeitschrift fur Nationalokonomie 44, pp. 63-69.
Flaschel, P. {1988): Fiscal Policy in an Accelerator-Augmented Classical Growth Cy-
cle. In: Flaschel, P./ Kriiger, M. ( eds. ): Recent Approaches to Economic
Dynamics, pp. 80-99. Frankfurt/M.: Peter Lang.
Flaschel, P./ Kriiger, M. {1984): Endogenous Aspirations in a Model of Cyclical
Growth. Ricerche Economiche 98, pp. 598-612.
Flaschel, P./Semmler, W. {1985): Classical and Neoclassical Competitive Adjust-
ment Processes. Manchester School 55, pp. 13-37.
Foley, D.K. (1986): Stabilization Policy in a Nonlinear Business Cycle Model. In:
Semmler, W. (ed. ): Competition, Instability, and Nonlinear Cycles, pp. 200-
211. Berlin-Heidelberg-New York: Springer.
Frank, M.Z./ Gencay, R./ Stengos, T. (1988): International Chaos? European
Economic Review 92, pp. 1569-1584.
Frank, M.Z./ Stengos, T. {1987): Measuring the Strangeness of Gold and Silver
Rates of Return. Mimeo. University of Guelph.
 References 227

Frank, M.Z./Stengos, T. {1988a): The Stability of Canadian Macroeconomic Data as

Measured by the Largest Lyapunov Exponent. Economics Letters 27, pp. 11-14.
Frank, M.Z./ Stengos, T. {1988b): Chaotic Dynamics in Economic Time Series.
Journal of Economic Surveys, forthcoming.
Frank, M.Z./ Stengos, T. {1988c): Some Evidence Concerning Macroeconomic
Chaos. Journal of Monetary Economics 22, pp. 423-438.
Frisch, R. {1933): Propagation Problems and Impulse Problems in Dynamic Eco-
nomics. In: Economic Essays in Honor of Gustav Cassel. London: Allen &
Unwin.
Gabisch, G. {1984): Nonlinear Models of Business Cycle Theory. In: Hammer, G./
Pallaschke, D. (eds. ): Selected Topics in Operations Research and Mathematical
Economics, pp. 205-222. Berlin-Heidelberg-New York: Springer.

Gabisch, G. {1985): Nichtlineare Differenzengleichungen in der Konjunkturtheorie.

In: Gabisch, G.jv.Trotha, H. {1985), pp. 5-25.
Gabisch, G. {1987): Nonlinearities in Dynamic Economic Systems. Atlantic Economic
Journal15, pp. 22-31.

Gabisch, G./ Lorenz, H.-W. {1989): Business Cycle Theory. 2nd ed., Berlin-
Heidelberg-New York: Springer.
Gabisch, G.jv.Throtha, H. {1985) {eds.): Dynamische Eigenschaften nicht-linearer
Differenzengleichungen und ihre Anwendungen in der Okonomie. GMD- Studien
97, Sankt Augustin.
Gaertner, W. {1986): Zyklische Konsummuster. Jahrbucher fur Nationalokonomie
und Statistik 201, pp. 54-65.
Gaertner, W. {1987): Periodic and Aperiodic Consumer Behavior. Applied Mathe-
matics and Computation 22, pp. 233-254.

Gandolfo, G. {1983): Economic Dynamics: Methods and Models. 2nd ed., Amster-
dam: North-Holland.
Garrido, L./ Simo, C. {1983): Prolog: Some Ideas About Strange Attractors. In:
Garrido, L. (ed.): Dynamical Systems and Chaos. Berlin-Heidelberg-New York:
Springer.
Georgescu-Roegen, N. (1971 ): The Entropy Law and Economic Progress. Cam-
bridge, MA: Harvard University Press.
Gleick, J. (1987): Chaos - Making a New Science. New York: Viking.
Glendinning, P./Sparrow, C. {1984): Local and Global Behavior near Homoclinic
Orbits. Journal of Statistical Physics 95, pp. 645-696.
228 References

Glombowski, J.j Kruger, M. (1987): Generalizations of Goodwin's Growth Cycle

Model. In: Batten, D.jCasti, J.j Johansson, B. (eds.): Economic Evolution
and Structural AdjuJtment, pp. 260-290. Berlin-Heidelberg-New York: Springer.
Goldberg, S. (1958): Introduction to Difference EquationJ. New York: Wiley.
Goodwin, R.M. (1947): Dynamical Coupling with Especial Reference to Markets
Having Production Lags. Econometrica 15, pp. 181-204.
Goodwin, R.M. (1951 ): The Nonlinear Accelerator and the Persistence of Business
Cycles. Econometrica 19, pp. 1-17.
Goodwin, R.M. (1967): A Growth Cycle. In: Feinstein, C.H. (ed. ): SocialiJm, Cap-
italiJm and Economic Growth. Cambridge: Cambridge University Press. Revised
version in: Hunt, E.K./Schwarz, J.G. (eds.) (1969): A Critique of Economic
Theory, pp. 442-449, Harmondsworth: Penguin.
Goodwin, R.M. (1986): The Economy as an Evolutionary Pulsator. Journal of Eco-
nomic Behavior and Organization 7, pp. 341-349.
Goodwin, R.M./ Kruger, M./ Vercelli, A. (eds.) (1984): Nonlinear Model., of
Fluctuating Growth. Berlin-Heidelberg-New York: Springer.
Grandmont, J.-M. (1985): On Endogenous Competitive Business Cycles. Economet-
rica 59, pp. 995-1045.
Grandmont, J.-M. (1986): Stabilizing Competitive Business Cycles. Journal of Eco-
nomic Theory 40, pp. 57-76.
Grandmont, J .-M. (1988): Nonlinear Difference Equations, Bifurcations, and Chaos.
CEPREMAP # 8811. Forthcoming in: Market PJychology and BuJineJJ Cycles.
Grandmont, J .-M./ Malgrange, P. (1986): Nonlinear Economic Dynamics: Intro-
duction. Journal of Economic Theory 40, pp. 3-12.
Granger, C.W.J.jHatanaka , M. (1964): Spectral Analysis of Economic Time Series.
Princeton University Press.
Grebogi, C./Ott, E./Pelikan, S./Yorke, J.A. (1984): Strange Attractors that are
not Chaotic. Physica 19D, pp. 261-268.
Grebogi, C./Ott, E.jYorke, J.A. (1987): Chaos, Strange Attractors, and Fractal
Basin Boundaries in Nonlinear Dynamics. Science 298, pp. 632-638.
Grassberger, P. (1986): Estimating the Fractal Dimension and Entropies of Strange
Attractors. In: Holden, A.V. (ed.): Chaos, pp. 291-311. Manchester University
Press.
Grassberger, P./Procaccia, I. (1983a): Measuring the Strangeness of Strange At-
tractors. Physica 9 D, pp. 189-208.
 References 229

Grass berger, P./Procaccia, I. (1983b ): Estimation of the Kolmogorov Entropy from

a Chaotic Signal. Phy!Jical Review A 28, pp. 2591-2593.
Guckenheimer, J. (1973): Bifurcation and Catastrophe. In: Peixoto, M.M. (ed.):
Dynamical Sy!Jtem!J pp. 95-109. New York-London: Academic Press.

Guckenheimer, J. (1979): Sensitive Dependence to Initial Conditions for One-

Dimensional Maps. Communication!J in Mathematical Physic!J 70, pp. 133-160.
Guckenheimer, J./Holmes, P. (1983): Nonlinear Oscillation!J, Dynamical Sy!ltems,
and Bifurcations of Vector Field!J. New York-Berlin-Heidelberg: Springer.

Guckenheimer, J ./ Oster, G./ Ipaktchi, A. (1977): The Dynamics of Density

Dependent Population Models. Journal of Mathematical Biology 4, pp. 101-147.
Haavelmo, T. (1956): A Study in the Theory of Economic Evolution. 2nd ed., Ams-
terdam: North-Holland.

Hahn, F.H. (1984): Stability. In: Arrow, K.J./Intriligator, M.D. (eds.) (1984):
Handbook of Mathematical Economics, Vol. II, pp. 745-793. Amsterdam: North-
Holland.
Hahn, W. (1967): Stability of Motion. Berlin-Heidelberg-New York: Springer.
Haken, H. (1982): Introduction. In: Haken, H. (ed. ): Evolution of Order and
Chao!J in Phy!Jic!J, Chemistry and Biology, pp. 2-4. Berlin-Heidelberg-New York:
Springer.
Haken, H. (1983a): Synergetics. An Introduction. 3rd ed., Berlin-Heidelberg-New
York: Springer.
Haken, H. (1983b ): Advanced Synergetic!J. Berlin-Heidelberg-New York : Springer.
Harcourt, G.C. (1984): A Twentieth-Century Eclectic: Richard Goodwin. Journal
of Po!lt-Keyne!Jian Economics 7, pp. 410-421.

Hassard, B.D./Kazarinoff, N.D./Wan, Y-H. (1981): Theory and Applications of

Hopf Bifurcation. Cambridge: Cambridge University Press.

Herrmann, R. (1985): Stability and Chaos in a Kaldor-type Model. DP 22, Depart-

ment of Economics, University of Gottingen.
Herrmann, R. (1986): Vergleich der dynami!Jchen Eigen!Jchaften stetiger und diskreter
zweidimensionaler K onjunkturmodelle. Dissertation Gottingen.

Hicks, J .R. (1950): A Contribution to the Theory of the Trade Cycle. Oxford Univer-
sity Press. 2nd. ed. (1965), Oxford: Claredon Press.
Hirsch, M.W. (1984): The Dynamical Systems Approach to Differential Equations.
Bulletin of the American Mathematical Society 11, pp. 1-64.
230 References

Hirsch, M.W. (1985): The Chaos of Dynamical Systems. In: Fischer, P./Smith,
W.R. (eds.): Chaos, Fractals, and Dynamics. New York-Basel: Marcel Dekker
Inc.
Hirsch, M.W./ Smale, S. {1974): Differential Equations, Dynamical Systems, and
Linear Algebra. New York: Academic Press.
Ichimura, S. {1955): Towards a General Non-Linear Macrodynamic Theory of Eco-
nomic Fluctuations. In: Kurihara, K.K. (ed.): Post-Keynesian Economics, pp.
192-226. New Brunswick: Rutgers University Press.
Intriligator, M. (1971 ): Mathematical Optimization and Economic Theory. Engle-
wood Cliffs: Prentice Hall.
Iooss, G. (1979): Bifurcations of Maps and Applications. Amsterdam: North Holland.
looss, G./ Joseph, D.D. (1980): Elementary Stability and Bifurcation Theory. New
York-Heidelberg-Berlin: Springer.
Kaldor, N. (1940): A Model of the Trade Cycle. Economic Journal 50, pp. 78-92.
Kalecki, M. (1937): A Theory of the Business Cycle. Review of Economic Studies 4,
pp. 77-97.
Kalecki, M. {1939): A Theory of the Business Cycle. In: Kalecki, M. {1972): Essays
in the Theory of Economic Fluctuation. London: Allen-Unwin.
Kalecki, M. (1954): Theory of Economic Dynamics. London: Unwin University
Books.
Kelsey, D. (1988): The Economics of Chaos or the Chaos of Economics. Oxford
Economic Papers 40, pp. 1-31.
Koc;ak, H. (1986): Differential and Difference Equations through Computer Experi-
ments. New York-Berlin-Heidelberg: Springer.

Kurths, J.fHerzel, H. (1987): An Attractor in a Solar Time Series. Physica 25D,

pp. 165-172.
Lanford, O.E. {1977): Computer Pictures of the Lorenz Attractor. In:Bernard, P./
Ratiu, T. (eds.): Turbulence Seminar Berkeley 1976/77. New York-Heidelberg-
Berlin: Springer.
Lanford, O.E. (1983): Introduction to the Mathematical Theory of Dynamical Sys-
tems. In: Iooss, G./ Heileman, R./ Stora, R. (eds.): Chaotic Behavior of
Deterministic Systems. Amsterdam-New York: North-Holland.

Larsen, E.R./Mosekilde, E./Rasmussen, S./Sterman, J. (1988): Entrainment

Between the Economic Long Wave and Other Macroeconomic Cycles. Mimeo.
The Technical University of Denmark.
 References 231

Lassalle, J .P./Lefschetz, S. (1961 ): Stability by Liapunov 's Direct Method with Ap-
plications. New York: Academic Press.
Lauwerier, H.A. (1986): One-Dimensional Iterative Maps. In: Holden, A.V. (ed.):
Chaos, pp. 39-57. Manchester University Press.
Lefschetz, S. (1948): Lectures on Differential Equations. Princeton University Press.
Levinson, N. (1943a): On the Existence of Periodic Solutions for Second Order Dif-
ferential Equations with a Forcing Term. Journal of Mathematical Physics 22, pp.
41-48.
Levinson, N. (1943b): On a Nonlinear Differential Equation of the Second Order.
Journal of Mathematical Physics 22, pp. 181-187.
Levinson, N. (1949): A Second Order Differential Equation with Singular Solutions.
Annals of Mathematics 50, pp. 127-153.
Levinson, N./Smith, O.K. (1942): A General Equation for Relaxation Oscillations.
Duke Mathematical Journal 9, pp. 382-403.
Levi, M. (1981 ): Qualitative Analysis of the Periodically Forced Relaxation Oscillation.
Memoirs of the American Mathematical Society 92-244, pp. 1-147.
Li, T.Y./ Misiurewicz, M./ Pianigiani, G./ Yorke, J.A. (1982): Odd Chaos.
Physics Letters 87A, pp. 271-273.
Li, T.Y./Yorke, J.A. (1975): Period Three Implies Chaos. American Mathematical
Monthly 82, pp. 985-992.
Lichtenberg, A.J ./Liebermann, M.A. (1982): Regular and Stochastic Motion. New
York-Heidelberg-Berlin: Springer.
Lienard, A. (1928): Etude des oscillations entretenues. Revue Generale del' Electricite
29, pp. 901-46.
Littlewood, J.E. (1957a): On Non-Linear Differential Equations of the Second Or-
der: III. The Equation y - k( 1 - y 2 )y + y = bJ.lk cos(J.lt + o:) for large k, and its
generalizations. Acata Mathematica 97, pp. 267-308.
Littlewood, J.E. (1957b): On Non-Linear Differential Equations of the Second Order:
IV. The General Equation y+kf(y )y+g(y) = bkp( 4> ), 4> = t+o:. Acta Mathematica
98, pp. 1-110.
Lorenz, E.N. (1963): Deterministic Non-Period Flows. Journal of Atmospheric Sci-
ences 20, pp. 130-141.
Lorenz, H.-W. (1985): On Chaos, Business Cycles, and Economic Predictability. In:
Gabisch, G.fv.Throtha, H. (1985): pp. 39-58.
Lorenz, H.-W. (1987a); International Trade and the Possible Occurrence of Chaos.
Economics Letters 29, pp. 135-138.
232 References

Lorenz, H.-W. {1987b): Strange Attractors in a Multisector Business Cycle Model.

Journal of Economic Behavior and Organization 8, pp. 397-411.

Lorenz, H.-W. {1987c): Can Keynesian Income Policy Imply Chaos? DP 33, Univer-
sity of Gottingen, Department of Economics.
Lorenz, H.-W. {1987d): Goodwin's Nonlinear Accelerator and Chaotic Motion. Zeit-
.'Jchrift for Nationalokonomie - Journal of Economic.'J 47, pp. 413-418.

Lorenz, H.-W. {1987e): On the Uniqueness of Limit Cycles in Business Cycle Theory.
Metroeconomica 98, pp. 281-293.

Lorenz, H.-W. {1988a): Optimal Economic Control and Chaotic Dynamics. In:
Feichtinger, G. {ed.): Optimal Control Theory and Economic Analy.'Ji.'J, Vol.
III, pp. 59-71, Amsterdam: North-Holland.
Lorenz, H.-W. {1988b ): Spiral-Type At tractors in Low-Dimensional Continuous-Time
Dynamical Systems. Mimeo. University of Gottingen.
Lorenz, H.-W. {1988c): Forced Oscillator Systems and Chaotic Motion in Dynamical
Economics. Paper presented at the Non-Linear Dynamic.'J and Social Science.'J -
1988 Meeting, Siena, Jan/7-9/1988.

Lorenz, H.-W. {1989): Strange Attractors in Dynamical Economics. In: Ames,

W.F.fBrezinski, C. {eds.): !MAGS Tran.'Jaction.'J on Scientific Computing, Vol.
1. Basel: J.C. Baltzer. Forthcoming.

Lotka, A.Y. {1925): Element.'J of Phy.'Jical Biology. Baltimore: Wiliams and Wilkens.
Lucas, R.E./ Sargent, T .J. {1978): After Keynesian Macroeconomics. In: Lucas,
R.E.fSargent, T .J. {1981) (eds. ): Rational Expectation.'J and Econometric Prac-
tice, pp. 295-319. Minneapolis: The University of Minnesota Press.

Malinvaud, E. {1977): The Theory of Unemployment Recon.'Jidered. Oxford: Basil-

Blackwell.
Malthus, T .R. {1798): An E.'J.'Jay on the Principle of Population. London: J .Johnson.
Marotto, F.R. {1978): Snap-Back Repellers Imply Chaos in Rn. Journal of Mathe-
matical A naly.'Ji.'J and Application.'J 72, pp. 199-223.

Marsden, J.E.fMcCracken, M. {1976): The Hopf Bifurcation and it.'J Applications.

New York-Heidelberg-Berlin: Springer.
Marshall, A. {1938): Principle.'J of Political Economy. 8th ed., London: MacMillan
and Co.
Mas-Colell, A. {1986): Notes on Price and Quantity Tatonnement Dynamics. In:
Sonnenschein, H. {ed.): Model.'J of Economic Dynamic.'J, pp. 49-68. Berlin-
Heidelberg-New York: Springer.
 References 233

May, R.M. (1976): Simple Mathematical Models With Very Complicated Dynamics.
Nature 261, pp. 459-467.

McKenzie, L.W. (1986): Optimal Economic Growth, Turnpike Theorems and Com-
parative Dynamics. In: Arrow, K.J./Intriligator, M.D. (eds.): Handbook of
Mathematical Economics III, pp. 1281-1355. Amsterdam: North-Holland.

Medio, A. (1980): A Classical Model of Business Cycles. In: Nell, E.J. (ed. ): Growth,
Profits, and Property. Cambridge: Cambridge University Press.

Medio, A. (1984a): Synergetics and Dynamic Economic Models. In: Goodwin,

R.M./ Kruger, M./ Vercelli, A. (eds.): Nonlinear Models of Fluctuating
Growth, pp. 166 - 191. Berlin-Heidelberg-New York: Springer.

Medio, A. (1984b): A Generalized Multiplier-Accelerator Model, via Ljapunov Vector

Functions and Hopf Bifurcation. University of Venice, Department of Economics,
Working Paper 8404.
Medio, A. (1987a): Oscillations in Optimal Growth Models. Journal of Economic
Behavior and Organization 8, pp.413-427.

Medio, A. (1987b ): Complex Behavior in Multisector Growth Models. Paper pre-

sented at the Third Viennese Workshop on Optimal Control Theory and Economic
Analysis.

Mees, A.I. (1981): Dynamics of Feedback Systems. New York: Wiley.

Melese, F./ Transue, W. (1986): Unscrambling Chaos Through Thick and Thin.
Quarterly Journal of Economics 101, pp. 419-423.

Metzler, L.A. (1941): The Nature and Stability of Inventory Cycles. Review of Eco-
nomic Studies 29, pp. 113-129.

Mill, J .St. (1973): A System of Logic Ratiocinative and Inductive. Collected Works
of John Stuart Mill, Vol. VII. and VIII. Toronto: University of Toronto Press.

Montrucchio, L. (1988): The Occurrence od Erratic Fluctuations in Models of Op-

timization over Infinite Horizon. In: Ricci, G./Velupillai, K. (eds.): Growth
Cycles and Multisectoral Economics: the Goodwin Tradition. Berlin-Heidelberg-
New York: Springer.

Newhouse, S./ Ruelle, D./ Takens, F. (1978): Occurrence of Strange Axiom A

Attractors near Quasi-Periodic Flows on Tm, m > 3. Communications in Mathe-
matical Physics 64, pp. 35-40.

Nijkamp, P. (1987): Long-Term Economic Fluctuations: A Spatial View. Socio-

Economic Planning 21, pp. 189-197.

Nitecki, Z. (1971 ): Differentiable Dynamics. Cambridge, MA: The MIT Press.

234 References

Nusse, H.E. (1986): Persistence of Order and Structure in Chaos. Physica 20D, pp.
374-386.
Nusse, H.E. (1987): Asymptotically Periodic Behavior in the Dynamics of Chaotic
Mappings. SIAM Journal of Applied Mathematics 47, pp. 498-515.
Ott, E. (1981 ): Strange At tractors and Chaotic Motions of Dynamical Systems. Review
of Modern Physics 59, pp. 655-671.
Ploeg, F. van der (1983): Predator-Prey and Neoclassical Models of Cyclical Growth.
Zeitschrift fur Nationalokonomie 49, pp. 235-256.

Ploeg, F. van der (1985a): Rational Expectations, Risk and Chaos in Financial
Markets. Economic Journal 96, Suppl., pp. 151-162.
Ploeg, F. van der (1985b): Classical Growth Cycles, Metroeconomica 97, pp. 221-
230.
Pohjola, M.J. (1981 ): Stable and Chaotic Growth: the Dynamics of a Disc• ~te Version
of Goodwin's Growth Cycle Model. Zeitschrift fur Nationalokonomie 41, pp. 27-
38.
Poincare, H. (1952): Science and Method. New York: Dover Publications. Original
published as: Science et Methode (1908), Paris: Flammarion.
Poston, T./Stewart, I. (1978): Catastrophe Theory and its Applications. Boston:
Pitman.
Preston, C. (1983): Iterates of Maps on an IntervaL Berlin-Heidelberg-New York:
Springer.
Prigogine, I. (1980): From Being to Becoming. San Francisco: W.H.Freeman.
Puu, T. (1987): Complex Dynamics in Continuous Models of the Business Cycle. In:
Batten,D./Casti, J.fJohansson, B. (eds.): Economic Evolution and Structural
Change. Berlin-Heidelberg-New York: Springer.

Ramsey, J.B./ Sayers, C.L./ Rothman, P. (1988): The Statistical Properties of

Dimension Calculations Using Small Data Sets: Some Economic Applications.
Mimeo. New York University.
Rand, R.H./ Holmes, P.J. (1980): Bifurcation of Periodic Motion in Two Weakly
Coupled VanDer Pol Oscillators. International Journal of Non-Linear Mechanics
15, pp. 387-399.
Reichlin, P. (1986): Equilibrium Cycles and Stabilization Policies in an Overlapping
Generations Model with Production. Journal of Economic Theory 40, pp. 89-102.
Reichlin, P. (1987): Output-Inflation Cycles in an Economy with Staggered Wage
Setting. Mimeo. European University Institute, Rome.
 References 235

Rossler, O.E. (1977): Continuous Chaos. In: Haken, H. (ed.): Synergetics. A

Workshop. Berlin-Heidelberg-New York: Springer.

Ruelle, D. (1979): Strange Attractors. Mathematical Intelligencer 2, pp. 126-137.

Ruelle, D./ Takens, F. (1971): On the Nature of Turbulence. Communications m

Mathematical Physics 20, pp. 167- 192.

Samuelson, P.A. (1939): Interactions Between the Multiplier Analysis and Principle
of Acceleration. Review of Economic Statistics 21, pp. 75-78.
Samuelson, P.A. (1947): Foundations of Economic Analysis. Cambridge, MA: Har-
vard University Press.
Samuelson, P.A. (1971 ): Generalized Predator-Prey Oscillations in Ecological and
Economic Equilibrium. In: Merton, R.C. (ed.) (1972): The Collected Scientific
Papers of P.A. Samuelson, Vol. III, pp. 487-90, Cambridge, MA: MIT-Press

Samuelson, P.A. (1972): A Universal Cycle? In: Merton, R.C. (ed.) (1972): The
Collected Scientific Papers of P.A. Samuelson, Vol. III, pp. 473-86, Cambridge,
MA: MIT-Press.
Saunders, P.T. (1980): An Introduction to Catastrophe Theory. Cambridge: Cam-
bridge University Press.
Sayers, C.L. (1988a): Diagnostic Tets for Nonlinearity in Time Series Data: An Ap-
plication to the Work Stoppages Series. Mimeo. University of North Carolina.
Sayers, C.L. (1988b ): Work Stoppages: Exploring the Nonlinear Dynamics. Mimeo.
University of Houston.
Scheinkman, J .A./ LeBaron, B. (1986): Nonlinear Dynamics and Stock Returns.
Mimeo. Department of Economics. University of Chicago.
Scheinkman, J.A./ LeBaron, B. (1988): Nonlinear Dynamics and GNP Data.
Mimeo. Department of Economics. University of Chicago.
Schinasi, G.J. (1981): A Non-Linear Dynamic Model of Short-Run Fluctuations. Re-
view of Economic Studies 48, pp. 649-656.

Schinasi, G.J. (1982): Fluctuations in a Dynamic, Intermediate-Run IS-LM Model:

Applications of the Poincare-Bendixon Theorem. Journal of Economic Theory 28,
pp. 369-375.
Schuster, H.G. (1984): Deterministic Chaos - An Introduction. Weinheim: Physik-
Verlag.
Semmler, W. (1986): A Macroeconomic Limit Cycle with Financial Perturbations.
Journal of Economic Behavior and Organization 8, pp. 469-495.
236 References

Silverberg, G. (1988): Modelling Economic Dynamics and Technical Change: Math-

ematical Approaches to Self-Organization and Evolution. In: Dosi, G. et al.
(eds. ): Technical Change and Economic Theory, forthcoming.
Sinai, J .G. (1976): Introduction to Ergodic Theory. Princeton: Princeton University
Press.
Singer, D. (1978): Stable Orbits and Bifurcation of Maps of the Interval. SIAM
Journal of Applied Mathematics 95, pp. 260-267.
Slutzky, E. (1937): The Summation of Random Causes as the Source of Cyclic Pro-
cesses. Econometrica 5, pp. 105-146.
Smale, S. (1963): Diffeomorphisms with Many Periodic Points. In: Cairns, S.S.
(ed. ): Differential and Combinatorical Topology, pp. 63-80. Princeton: Princeton
University Press.
Smale, S. (1967): Differentiable Dynamical Systems. In: Smale, S. (1980): The
Mathematics of Time. New York-Heidelberg-Berlin: Springer.
Sotomayor, J. (1973): Generic Bifurcations of Dynamical Systems. In: Peixoto,
M.M. (ed.): Dynamical Systems, pp. 549-560. New York: Academic Press.
Sparrow, C. (1982): The Lorenz Equations. New York-Heidelberg-Berlin: Springer.
Sterman, J.D. (1988): Deterministic Chaos in Models of Human Behavior: Method-
ological Issues and Experimental Results. System Dynamics Review 4, pp. 148-
178.
Sterman, J.D. (1989): Deterministic Chaos in an Experimental Economic System.
Journal of Economic Behavior and Organization, forthcoming.
Sterman, J .D.fMosekilde, E./Larsen, E. (1988): Experimental Evidence of Deter-
ministic Chaos in Human Decision Making Behavior. WP 2002-88, Sloan School
of Management, MIT.
Stoker, J.J. (1950): Nonlinear Vibrations. New York: lnterscience Publishers.
Stutzer, M. (1980): Chaotic Dynamics and Bifurcation in a Macro-Model. Journal of
Economic Dynamics and Control 2, pp. 253-276.
Swinney, H.L. (1983): Observations of Order and Chaos in Nonlinear Systems. Phys-
ica 7D, pp. 3-15.
Takayama, A. (1974): Mathematical Economics. Hinsdale, Ill.: The Dryden Press.
Takens, F. (1981): Detecting Strange Attractors in Turbulence. In: Rand, D.f
Young, L. (eds. ): Dynamical Systems and Turbulence. Berlin-Heidelberg-New
York: Springer.
Thorn, R. (1977): What is Catastrophe Theory about? In: Haken, H. (ed.): Syner-
getics. A Workshop. Berlin-Heidelberg-New York: Springer.
 References 237

Thompson, J.M.T.jStewart, H.B. (1986): Nonlinear Dynamics and Chaos. Chich-

ester-New York: John Wiley.
Tomita, K. (1986): Periodically Forced Nonlinear Oscillators. In: Holden, A.V.
(ed.): Chaos, pp. 211-236. Manchester: Manchester University Press.
Torre, V. (1977): Existence of Limit Cycles and Control in Complete Keynesian Sys-
tems by Theory of Bifurcations. Econometrica 45, pp. 1457-1466.
Tresser, C. (1982): About some Theorems by L.P. Sil'nikov. Annales de l'Institut
Henri Poincare 40, pp. 441-461.
Ulam, S.M.fv.Neumann, J. (1947): On Combination of Stochastic and Determin-
istic Processes. Bulletin of the American Mathematical Society 5:1, p. 1120.
Varian, H.R. (1979): Catastrophe Theory and the Business Cycle. Economic Inquiry
17, pp. 14-28.
Varian, H.R. (1981): Dynamical Systems with Application to Economics. In: Arrow,
K.J.flntriligator, M.D. (eds.): Handbook of Mathematical Economics, Vol. I,
pp. 93-110. Amsterdam: North Holland.
Vastano, J.A./Kostelich, E.J. (1986): Comparison of Algorithms for Determining
Lyapunov Exponents from Experimental Data. In: Mayer-Kress, G. (ed.):
Dimensions and Entropies in Chaotic Systems, pp. 100-107. Berlin-Heidelberg-
New York: Springer.
Velupillai, K. (1978): Some Stability Properties of Goodwin's Growth Cycle Model.
Zeitschrift fur Nationalokonomie :19, pp. 245-257.
Velupillai, K. (1987): What have we learned in the Path from Godel and Turing to
Artificial Intelligence? Mimeo. UCLA.
Velupillai, K./Ricci, G. (1988): Introduction. In: Ricci, G./Velupillai, K. (eds.):
Growth Cycles and Multisectoral Economics: the Goodwin Tradition. Berlin-
Heidelberg-New York: Springer.
Vercelli, A. (1984): Fluctuations and Growth: Keynes, Schumpeter, Marx, and the
Structural Instability of Capitalism. In: Goodwin, R.M./ Kruger, M.fVer-
celli, A. (eds. ): Nonlinear Models of Fluctuating Growth, pp. 209-231. Berlin-
Heidelberg-New York: Springer.
Volterra, V. (1931): Lecons sur la Theorie Mathematique de la Lutte pour la Vie.
Paris: Gauthier-Villars.
Walras, L. (1874): Principe d'une Theorie Mathematique de l'Echange. Journal des
Economistes, Annee 33, T. 34, pp. 1-21.
Walras, L. (1876): Theorie der Preisbestimmung der wirthschaftlichen Guter. Stutt-
gart: Ferdinand Enke.
238 References

West, B.J. (1985): An Essay on the Importance of Being Nonlinear. Berlin-Heidelberg-

New York: Springer.
White, R.W. {1985): Transitions to Chaos with Increasing System Complexity: The
Case of Regional Industrial Systems. Environment and Planning A 17, pp. 387-
396.
Whitley, D. (1983): Discrete Dynamical Systems in Dimensions One and Two. Bul-
letin of the London Mathematical Society 15, pp. 177-217.
Wolf, A. {1986): Quantifying Chaos with Lyapunov Exponents. In: Holden, A.V.
(ed.): Chaos, pp. 273-290. Manchester University Press.
Wolf, A./Swift, J.B./Swinney, H.L./Vastano, J.A. {1985): Determining Lyapu-
nov Exponents From a Time Series. Physica 16 D, pp. 285-317.
Wolf, A./ Vastano, J .A. (1986): Intermediate Length Scale Effects in Lyapunov
Exponent Estimation. In: Mayer-Kress, G. (ed.): Dimensions and Entropies
in Chaotic Systems, pp. 94-99. Berlin-Heidelberg-New York: Springer.
Wolfstetter, E. (1982): Fiscal Policy and the Classical Growth Cycle. Zeitschrift fur
Nationalokonomie 42, pp. 375-393.
Woodford, M. (1987): Equilibrium Models of Endogenous Fluctuations. Mimeo.
University of Chicago.
Woodford, M. {1989): Imperfect Financial Intermediation and Complex Dynamics.
In: Barnett, W.A./ Geweke, J./ Shell, K. (eds.): Economic Complexity:
Chaos, Sunspots, Bubbles, and Nonlinearity. Cambridge University Press: Forth-
coming.
Woodcock, A.E.R./Davis, M. (1979): Catastrophe Theory. London: Penguin.
Zeeman, E.C. (1977): Catastrophe Theory. Selected Papers 1972-77. Reading, Mass.:
Addison-Wesley.
Zhang, W-B. (1988): Hopf bifurcations in multisector models of optimal economic
growth. Economics Letters 26, pp. 329-334.
Name Index

A Berge, P., 102, 141, 147, 170, 176ff.,

181, 184, 222
Abraham, R.H., 102, 151, 220 Bernard, P., 230
Alexander, J.C., 76, 220 Berndt, E.R., 221, 223
Allen, R.G.D., 16, 220 Bernoulli, D., 8
Ames, W.F., 232 Blackwell, D., 126, 222
Ancot, J.P., 224 Blad, M.C., 222
Andronov, A.A., 41, 53, 220 Blatt, J.M., 28, 222
Arneodo, A., 167, 169, 173, 220, 224 Blaug, M., 11, 222
Arnold, V.I., 56, 66, 205, 221 Boldrin, M., 85, 125, 222f.
Arrow, K.J., 26, 221, 229, 237 Boyce, W.E., 39ff., 47, 223
Arrowsmith, D.K., 39, 41, 53, 56, 221 Boyd, I., 223
Brezinski, C., 232
Brock, W.A., 29, 102, 127, 179f., 191,
B 197f., 223

Barnett, W.A., 179, 199, 221, 223, c

238
Batten, D., 228, 234
Baumol, W.J., 26, 102, 221
Begg, D.K.H., 128, 196, 221
Bellman, R., 126, 222
Benassy, J.P., 46, 222
Benhabib, J., 78, 88f., 102, 124, 128f.,
221f.
Cairns, S.S., 236
Cartwright, M.L., 15, 151, 155, 223
Casti, J ., 228, 234
Chaikin, C.E., 41, 53, 220
Chang, W.W., 42f., 224
Chen, P., 102, 179, 199, 221, 224
Chiarella, C., 48, 128, 224
240 Name Index

Choi, S., 199, 221 Fisher, 1., 10, 226

Clark, C.W., 52, 224 Flaschel, P., 59f., 226
Coddington, E.A., 39, 224 Foley, O.K., 90, 226
Collet, P., 102f., 107, 111, 117f., 224 Frank, M.Z., 179, 198, 200, 226f.
Coullet, P., 167, 169, 220, 224 Frisch, R., 28, 227
Crutchfield, J.P., 7f., 224
Cugno, F., 60, 98, 224 G
D Gabisch, G., 28f., 42, 46, 48, 59, 128,
155, 196, 205, 208, 211, 227, 231
Dale, C., 176, 224 Gaertner, W., 128, 227
Dana, R.A., 83, 130, 224 Galilei, G., 6
Davis, M., 213, 238 Gandolfo, G. 16, 20, 53, 86, 170, 227
Day, R.M., 119, 128f., 222 , 224f. Garrido, L., 142, 227
De Baggis, H.F., 225 Gencay, R., 198, 226
Debreu, G., 10, 26, 41, 225 Georgescu-Roegen, N., 9, 227
Dechert, W.O., 191, 198, 223 Geweke, J., 221, 238
Dendrinos, D.S., 129, 225 Gleick, J., 227
Deneckere, R., 127, 225 Glendinning, P., 169, 227
Dernburg, J.D. 86, 225 Glombowski, J ., 59, 228
Dernburg, T.F. 86, 225 Goldberg, S., 228
Desai, M., 59, 225 Goodwin, R.M., 15, 57, 59, 15lf.,
Descartes, R., 6 155f., 224, 228, 233, 237
Devaney, R.L., 102, 130, 225 Grandmont, J.-M., 103, 128, 163, 228
Diamond, P., 225 Granger, C.W.J., 176, 228
DiPrima, R.L., 39ff., 47, 223 Grassberger, P., 184, 19lf., 194, 228f.
Dosi, G., 236 Grebogi, C., 183, 228
Guckenheimer, J., 34, 36, 38f., 48, 65,
E 67, 76, 80 f., 87, 96f., 114, 118f.,
151, 153, 163, 167f., 179, 188,
Eckmann, J.-P., 102f., 107, 111, 117f., 229
179, 188, 190, 192, 224, 225
Euler, 1., 8 H

F Haavelmo, T., 122, 229

Hahn, F.H., 20, 35, 221, 229
Farmer, J.D., 188, 202, 224, 226 Hahn, W., 36, 229
Farmer, R.E.A., 99, 226 Haken, H., 145, 192, 204, 229, 238 6
Fatou, P., 101 Hammer, G., 227
Feichtinger, G., 82, 226 Harcourt, G.C., 15, 229
Feigenbaum, M., 107, 226 Hassard, B.D., 76, 229
Fischer, E.O., 215, 226 Hatanaka, M., 176, 228
Fischer, P., 220, 230 Hegel, G.W.F., 8
 Name Index 241

Helleman, R., 230 L

Herrmann, R., 84, 134, 229
Herzel, H., 191, 230 Lagrange, J. de, 8
Hicks, J.R., 29, 229 Lanford, O.E., 137, 163, 230
Hinich, M.J., 199, 221 Laplace, P.S., 7f., 62
Hirsch, M.W., 16, 36, 39f., 47, 54, Larsen, E., 151, 201, 236
229£. Lassalle, J.P., 36, 231
Holden, A.V., 231, 237£. Lauwerier, H.A., 231
Holmes, P., 34, 36, 38f., 48, 65, 67, LeBaron, B., 198, 200, 235
76, 80f., 87, 96£., 114, 151, 153, Lefschetz, S., 36, 225, 231
163, 167£., 179, 188, 229, 234 Leibniz, G.W., 6
Hunt, E.K., 228 Levi, M., 151, 153, 231
Levinson, N., 15, 39, 47, 151, 224,
I 231
Li, T.Y., 15, 114, 231
Lichtenberg, A.J ., 231
Ichimura, S., 48, 230
Liebermann, M.A., 231
Intriligator, M.D., 229f., 237
Littlewood, J.E., 15, 151, 223, 231
Iooss, G., 96, 230
Lienard, A., 231
Ipaktchi, A., 229
Lorenz, E.N., 14, 101, 231
Lorenz, H.-W., 28f., 42, 46, 48, 59,
J 148, 155, 157, 196, 205, 208, 211,
227, 23lf.
Jammemegg, W., 215, 226 Lotka, A.Y., 52, 232
Jevons, W.S., 2, 9 Lucas, R.E., 27, 196, 232
Johansson, B., 228, 234
Joseph, D.D., 230
Julia, G., 101 M

Malgrange, P., 83, 130, 224, 228

K
Malinvaud, E., 232
Malthus, T.R., 25, 94, 232
Kaldor, N., 42ff., 230
Marotto, F.R., 132, 135, 232
Kalecki, M., 28, 42, 195, 230
Marsden, J.E., 76, 80, 220, 232
Kant, I., 6
Marshall, A., 2, 11f., 25, 232
Kazarinoff, N.D., 229
Marx, K., 8
Kelsey, D., 102, 129, 230
Mas-Colell, A., 47, 232
Kepler, J., 6
May, R.M., 104, 233
Kim, K.-H., 225
Mayer-Kress, G., 237£.
Ko<;ak, H., 101, 230
McCracken, M., 76, 80, 232
Kostelich, E.J ., 194, 237
McKenzie, L.W., 127, 233
Kruger, M., 59, 226, 228, 233, 237
Medio, A., 174, 205, 233
Kurihara, K.K., 230
Mees, A.I., 163, 233
Kurths, J., 191, 230
Melese, F., 119, 233
242 Name Index

Merton, R.C., 235 Procaccia, I., 184, 192, 194, 228£.

Metzler, L.A. 170, 233 Puu, T., 146, 148, 155, 234
Mill, J.S., 6, 11, 233
Misiurewicz, M., 231
Miyao, T., 78, 222 R
Montrucchio, L., 60, 98, 125, 222ff.,
233 Ramsey, J.B., 199, 234
Mosekilde, E., 151, 201, 236 Rand, R.H., 234, 236
Rasmussen, S., 151, 230
N Ratiu, T., 230
Reichlin, P., 87, 99, 234
Nell, E.J., 233 Reuter, G.E.H., 151, 155, 223
Neumann,J. von, 104,237 Ricardo, D., 5£., 25
Newhouse, S., 148, 233 Ricci, G., 15, 233, 237
Newton, I., 6, 8 Rothman, P., 199, 234
Nijkamp, P., 129, 225, 233 Ruelle, D., 15, 96, 137, 147, 179, 188,
Nishimura, K., 88£., 124, 222 190, 192, 225, 233, 235
Nitecki, Z., 163, 233 Rossler, O.E., 235
Nusse, H.E., 117, 119, 234

0
s
Samuelson, P.A., 60, 235
Oster, G., 229 Sargent, T.J., 27, 232
Ott, E., 102, 130, 142, 193, 226, 228, Saunders, P.T., 205£., 210, 235
234 Sayers, C.L., 179, 199, 223, 234£.
Scheinkman, J.A., 127, 198, 200, 223,
p 235
Schinasi, G.J., 48, 235
Packard, N.H., 224 Schuster, H.G., 102, 235
Pallaschke, D., 227 Schwarz, J.G., 228
Pareto, W., 2, 9, 25 Schwodiauer, G., 223
Peixoto, M.M., 236 Scott, K.A., 151, 220
Pelikan, S., 127, 225, 228 Semmler, W., 82, 226
Phillips, A.W., 48 Shafer, W., 128, 225
Pianigiani, G., 231 Shaw, C.D., 102, 220
Place, C.M., 39, 41, 53, 56, 221 Shaw, R.S., 224
Ploeg, F. van der , 59, 128, 234 Shell, K., 221, 238
Pohjola, M.J., 59, 128, 234 Sidorowich, J.J., 202, 226
Poincare, H., 14, 101, 234 Silverberg, G., 218, 236
Pomeau, Y., 170, 222 Sim6, C., 142, 227
Poston, T., 206, 210, 234 Sinai, J.G., 111, 236
Preston, C., 103, 117, 234 Singer, D., 103, 117, 236
Prigogine, I., 234 Slutzky, E., 28, 195, 236
 Name Index 243

Smale, S., 16, 36, 39f., 47, 54, 167, Velupillai, K., 15, 59, 233, 237
230, 236 Vercelli, A., 66, 228, 233, 237
Smith, A., 5f., 25 Vidal, C, 169, 222
Smith, O.K., 47, 231 Voltaire, 6
Smith, W.R., 220, 230 Volterra, V., 52, 237
Smyth, D.J., 42f., 224
Sonnenschein, H., 232
Sorger, G., 82, 226 w
Sotomayor, J ., 75, 236
Sparrow, C., 169, 227, 236 Walras, 1., 2, 9f., 13, 25, 237
Stengos, T ., 179, 198, 200, 226f. Wan, Y-H., 229
Sterman, J.D., 151, 201, 230, 236 Weber, W.E, 199, 221
Stewart, 1., 206, 210, 234 West, B.J., 8, 93f., 238
Stewart, H.B., 102, 144, 163, 237 White, H., 221, 223
Stoker, J.J., 236 White, R.W., 129, 238
Stora, R., 230 Whitley, D., 67, 103, 238
Stutzer, M., 122, 236 Wolf, A., 188f., 191, 193f., 238
Swift, J .B., 238 Wolfstetter, E., 60, 238
Swinney, H.L., 236, 238 Woodcock, A.E.R., 213, 238
Szegce, G.P., 224 Woodford, M., 129, 238

T
y
Takayama, A., 16, 35, 236
Takens, F., 15, 96, 147, 179, 233, Yorke, J.A., 15, 76, 102, 114, 220,
235f. 226, 228, 231
Thorn, R., 205, 236 Young, L., 236
Thompson, J.M.T., 102, 144, 163,
237
Tomita, K., 151, 237 z
Torre, V., 148, 237
Transue, W., 119, 233 Zeeman, E.C., 205, 238
Tresser, C., 167, 169, 220, 224, 237 Zhang, W-B., 88, 238
Trotha, H. von, 227

u
Ulam, S.M., 104, 237

v
Varian, H.R., 39, 237
Vastano, J.A., 194, 237f.
Subject Index

A
bifurcation (continued):
accelerator, 29 bifurcation value, 66
adiabatic approximation, 203f. flip, 92
a-stability, 33 fold, 67, 91
amplitude, 22 Hopf, see Hopf bifurcation
approximation, linear, 27, 31 pitchfork, 72, 91
area preserving system, 55 subcritical, 73, 77, 93
attracting set, 34 supercritical, 72, 79, 93
attractor, 32, 37, 55 transcritical, 69, 91
autocorrelation function, 177 branch of equilibria, 65
averaging, 48 broad band noise, 178

B c
backward iteration, 121 Cantor set, 165, 182
basin of attraction, 34, 78 capital stock, 49
basin boundary, 34 catastrophe theory, 205ff.
Bellman's equation, 126 catastrophes, elementary, 206
Bendixson criterion, 44 fold, 207f.
Bernoulli differential equation, 123 cusp, 207ff.
bifurcation, 64ff. swallowtail, 207
bifurcation diagram, 65 butterfly, 207
bifurcation point, 65 elliptic umbilic, 207
bifurcation set, 208 hyperbolic umbilic, 207
 Subject Index 245

catastrophes (continued): dimension (continued):

parabolic umbilic, 207 fractal, see fractal dimension,
ceiling, 29 Hausdorff, see Hausdorff dimen-
center dynamics, 18 sion,
center manifold, 81, 87 discount factor, 125
chaos, discount rate, 89
in discrete-time models, 103ff. discriminant, 86, 208
in continuous-time models, 135ff. dissipative system, 52, 61, 189
empirical results, 197ff. divergence, 55, 187
characteristic equation, see equation
characteristic roots, see roots, charac- E
teristic
class struggle, 57
eigenvalues, see roots, characteristic,
classical mechanics, 18
embedding dimension, 179f.
closed orbit, 18, 37, 40
enlightenment, 6
cobweb model, 128
entropy,
codimension, 206
Kolmogorov, see Kolmogorov en-
complex roots, see roots, complex
tropy,
conservative system, 51, 61
ergodicity, 111
consumption frontier, 89, 126
equation,
contraction, on an attractor, 164
characteristic eq., 17
correlation,
difference eq., 21ff., 91ff., 103ff.
dimension, 181, 184
differential eq., 16ff., 65ff., 135ff.,
integral, 184
204ff.
corridor stability, 78
Lienard eq., 47, 49, 159
coupling of oscillators, 143ff.
logistic eq., 104, 127, 139, 178
critical value, 104
Rayleigh eq., 156
van der Pol eq., 47, 151
equilibrium surface, 208
D
equivalence, 66, 167
Euclidian dimension, 181
DeMoivre's theorem, 23
evolutionary economics, 26
depression, 212
exchange of stability, 69
determinant, 17
expanding fixed point, 132
deterministic worldview, 8
diffeomorphism, 130, 163
differential operator, 97, 123 F
dimension,
of an attractor, 181ff. Feigenbaum number, 107
correlation, see correlation dimen- financial markets, 128
sion, finite differences, 97, 123
embedding, see embedding dimen- first integral, 53
sion, first return map, 141
Euclidian, see Euclidian dimension, fixed point,
246 Subject Index

fixed point (continued): hyperbolic fixed point, 66

stable, 35
expanding fixed point, 132 I
of order k, 105££.
floor, 29 implicit function theorem, 76
flow, 32, 52 lnada conditions, 71
focus, 18 income effect, 68
folding, on an attractor, 186 input-output model, 205
forced oscillation, see oscillator, intermittency, 113
forced, invariant set, 39, 162, 166, 174
Fourier transform, 176 invertibility, 104, 130, 169f.
fractal dimension, 183££. irreversible processes, 61f.
frequenc~ 18, 143, 176 isolation technique, 8
friction, 52 iterative, 93

G J

Gaussian plane, 23, 77 Jacobian matrix, 36

general equilibrium analysis, 13, 30, joint probability, 192
129
generations, overlapping, 99, 129 K
Goodwin model,
nonlinear accelerator, 155££. Keynesian demand policy, 157f.
predator-prey, 57, 98, 128 Kolmogorov entropy, 191££.
gradient systems, 207
growth model, 70, 119
L
H laboratory experiment, 201
Landau scenario, 147
Hamiltonian, 89 Lausanne school, 9
harmonic oscillator, 18 Lebesgue measure, 118, 122
Hausdorff dimension, 182, 193 Levi/Poincare map, 153
heaviside function, 184 Levinson/Smith theorem, 47, 159
Henon map, 130 Li/Yorke theorem 115, 122
Hicks model, 29 Liapunov, see Lyapunov
histogram, 110 Lie derivative, 55ff., 173
homoclinic, Lienard equation, see equation,
orbits, 38, 133, 168 limit cycle, 37, 54, 190
points, 166 uniqueness, 46££.
Hopf bifurcation, limit point, 33
discrete time, 96££. limit set, 33
continuous time, 75££., 146f., 203 Lorenz attractor, 136
horseshoe map, 151, 163 Lotka/Volterra equations, 53, 59
 Subject Index 247

Lyapunov, p
dimension, 193
exponent, 181, 186 perfect foresight, 129
function, 36 period doubling, 93, 107
numbers, 186 Pesin's identity, 194
spectrum, 186 Phillips curve, 59f., 213
Poincare-Bendixson theorem, 39, 44,
M 52,85
Poincare map, 64, 91, 139, 153, 163
mechanistic worldview, 12 Poincare section, 139
mercantilistic policy, 6 polar coordinates, 81
Metzler model, 170 policy function, 125, 127
m-history, 198 population dynamics, 93ff.
mixing behavior, 119 potential, 207
modulus, 23, 97 power spectrum, 177
multiplicative ergadic theorem, 188 predator-prey system, 51, 56
multiplier-accelerator model, 29, 48, predictability, 7, 62, 201
128 principal minors, 86

N Q

nearest neighbor, 202 quantum mechanics, 14

neutrally stable, 53 quasi-periodic motion, 144
New Classical Macroeconomics, 28
Newhouse/Ruelle/Takens theorem R
148£.
node, 18
random process, 100, 202
noisy chaos, 217
random terms, 28
nonlinear accelerator, 152, 155
rational expectations, 28, 195
non-invertibility, 104££., 170
Rayleigh eq., see equation,
non-wandering set, 34
reaction speed, 49
normal form, 80
recession, 212
relativity theory, 14
0 repeller, 34
residual diagnostic, 197
w-stability, 33 reversibility, 61£.
optimal control, 30 roots,
continuous-time, 87ff. characteristic, 17£.
discrete-time, 124££. complex, 18, 23, 83
order equation, 204 dominant, 22
oscillator, real, 18, 22
coupled, 143££. Rossler attractor, 136, 169
forced, 15lff. routes to turbulence, 147£.
248 Subject Index

Routh-Hurwitz criterion, 86 substitution effect, 68

Ruelle-Takens scenario, 148 S-unimodal map, 117
supercritical, see bifurcation
superposition, principle of, 8, 13
s synergetics, 204

saddle loop, 38
T
saddle node, 67
saddle point, 18, 88
Taylor expansion, 35, 43
Sarkovskii theorem, 114
topologically transitive, 116
saturation, 94, 120
torus, 143, 190
sawtooth oscillation, 22
trace, 17, 52
Schwarzian derivative, 93, 117, 122,
trajectory, 32
124
transient, 34, 63, 110
scientific progress, 25
transient chaos, 155
sensitive dependence, 112, 116
transversal homoclinic orbit, 166
separatrix, 18
transversality, 67
set,
trapping region, 155
bifurcation set, 208
connected set, 41
limit, 33 u
singularity set, 208
uncountable, 115 unfolding, universal, 206
Shilnikov theorem, 16S unimodal map, 125
shuffle diagnostics, 198 unit circle, 97
sink, 20 universal constant, 107
slaving principle, 204 urban decline, 129
Smale-Birkhoff homoclinic theorem,
167
snap-back repeller, 132 v
solution curve, 32
source, 20 value function, 126
spectral analysis, 176 van der Pol oscillator, 47, 151
stability, variables, 204, 206
asymptotic, 20, 35 vector field, 32
global, 35 Verhulst dynamics, 94, 104
neutral, 18 volume preserving system, 55
structural, 60f., 66, 206
stagflation, 213
stochastics, 195
w
strange attractor, 101, 130, 136f., wandering set, 34
148, 181 weltanschauung, 11
stretching, 164, 186 windows, 109
subcritical, see bifurcation