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Chaos in Economics
Abstract
The paper introduces applications of chaos theory in economics. By studying some economic models which exhibit chaotic behavior both in discrete and continuous times and in different dimensions, this paper demonstrates wide applications of chaos theory in different schools of economics. In particular, the paper argues that chaos theory is a basic tool for integrating various economic theories within a new dynamic theory. The paper first introduces the topic and gives a basic survey of the early literature. Then it examines chaotic behavior of some economic models. Application 1 introduces the logistic map and examines the one-dimensional discrete growth model with population by Haavelmo and Stutzer. Application 2 identifies economic chaos in the disequilibrium inventory model by Hommes. Application 3 studies a long-run competitive two-periodic OLG model with money and capital. Application 4 discusses the Lorenz equations and its application to urban dynamics. Application 5 introduces the traditional optimal growth model with multiple capital goods, demonstrating the existence of periodic and aperiodic solutions. Finally we conclude the study and discuss some implications of chaos theory for creating a general economic theory.
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