Nonlinear Dynamical Economics

and
Chaotic Motion
Second Edition

by

Hans-Walter Lorenz
Volkswirtschaftliches Seminar
Georg-August-Universitat
Platz der Gottinger Sieben 3
W-3400 Gottingen, Germany

To My Parents

VII

...only nonlinear differential equations have interesting dynamics.

M. Hirsch (1984)

Unfortunately, many of the most

important processes in nature are inherently nonlinear.
R.L. Devaney (1992)

There are no true fractals in nature.

( There are no true straight lines or circles either!)
K. Falconer (1990)

Prefaces

Preface to the Second Edition

Usually, the rst edition of a book still contains a multiplicity of typographic, conceptional, and computational errors even if one believes the opposite at the time
of publication. As this book did not represent a counterexample to this rule, the
current second edition offers a chance to remove at least the known shortcomings.
The book has been partly re-organized. The previously rather long Chapter 4
has been split into two separate chapters dealing with discrete-time and continuoustime approaches to nonlinear economic dynamics. The short summary of basic
properties of linear dynamical systems has been banned to an appendix because
the line of thought in the chapter seems to have been unnecessarily interrupted
by these technical details and because the book concentrates on nonlinear systems.
This appendix, which mainly deals with special formal properties of dynamical systems, also contains some new material on invariant subspaces and center-manifold
reductions. A brief introduction into the theory of lags and operators is followed
by a few remarks on the relation between the true properties of dynamical systems
and their behavior observable in numerical experiments. Additional changes in the
main part of the book include a re-consideration of Poppers determinism vs. indeterminism discussion in the light of chaotic properties of deterministic, nonlinear
systems in Chapter 1. An investigation of a simultaneous price-quantity adjustment
process, a more detailed inquiry into the uniqueness property of limit cycles, and
a short presentation of relaxation oscillations are included in Chapter 2. Chapter
3 now starts with an extended discussion of different structural stability concepts.
While the material on chaotic dynamics in Chapters 4 and 5 still concentrates on the
motion on attractors, the importance of complex transient motion is emphasized
in the current edition.
The literature on chaotic dynamics in economics is rapidly growing. It is therefore difcult if not impossible to keep track of all the advances made in the last

Prefaces

years. As this book concentrates on methodological aspects and usually discusses

only simple economic examples, not all economically relevant contributions in the
literature could be presented in detail. The papers known to the author are however listed in the appropriate sections.
Most numerical calculations and associated plots in this edition were performed
with the help of the Dynamical Software package and the Dynamics program.
This is not mentioned because the responsibility for the correctness of the numerical results should be shifted to other sources. It should only prevent the reader
interested in performing his own calculations from re-inventing the wheel and turn
his attention to the existing elaborated packages. All other illustrations were produced with a standard CAD program or commercial plotting routines; the manuscript was again typeset in TEX.
It is a pleasure for me to thank all those friends and colleagues who commented
on improving the text. Particular thanks go to C. Chiarella, P. Flaschel, D. Furth,
L. Nicelli, and B. Woeckner who all provided more or less extensive error lists. G.
Konigsberg copy-edited several new parts of the text. The assistance of B.K.P. Horn
of Y&Y in the management of diverse PostScript fonts is greatly appreciated.

Gottingen, February 1993

Hans-Walter Lorenz

Preface to the First Edition

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. BerlinHeidelberg-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 elds 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.-W. 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 conceptual misunderstandings and aws. Particular thanks

Prefaces

XI

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 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
nal manuscript was typeset in PCTEX.

Gottingen, March 1989

Hans-Walter Lorenz

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. Economic Dynamics, Linearities, and the Classical Mechanistic
Worldview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.1. Some Reections on the Origin of Economic Dynamics . . . . . . . . . . . . . . . . . 6
1.2. The Deterministic Worldview and Deterministic Theories . . . . . . . . . . . . . . 13
1.3. The Dominance of Linear Dynamical Systems in Economics . . . . . . . . . . . 19
2. Nonlinearities and Economic Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.1. Preliminary Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.2. The Poincare-Bendixson Theorem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.2.1. The Existence of Limit Cycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.2.2. The Kaldor Model as a Prototype Model in Nonlinear
Economic Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.2.3. A Classical Cross-Dual Adjustment Process . . . . . . . . . . . . . . . . . . . . . . 47
2.3. The Uniqueness of Limit Cycles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
2.3.1. The Lienard Equation and Related Tools . . . . . . . . . . . . . . . . . . . . . . . 51
2.3.2. The Symmetric Case: Unique Cycles in a Modied Phillips
Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
2.3.3. The Asymmetric Case: Unique Cycles in a Kaldor Model . . . . . . . . 57
2.4. Predator-Prey Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.4.1. The Dynamics of Conservative Dynamical Systems . . . . . . . . . . . . . . . 61
2.4.2. Goodwins Predator-Prey Model of the Class Struggle . . . . . . . . . . . . 67

XIV

Contents

2.4.3. Other Examples and Predator-Prey Structures in

Dissipative Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
2.5. Relaxation Oscillations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
2.6. Irreversibility and Determinism in Dynamical Systems . . . . . . . . . . . . . . . . . . 77
3. Bifurcation Theory and Economic Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.1. Preliminaries and Different Concepts of Structural Stability . . . . . . . . . . . . 81
3.2. Local Bifurcations in Continuous-Time Dynamical Systems . . . . . . . . . . . . . 87
3.2.1. Fold, Transcritical, and Pitchfork Bifurcations . . . . . . . . . . . . . . . . . . . 87
3.2.2. The Hopf Bifurcation in Continuous-Time Dynamical Systems . . . 95
3.2.2.1. The Hopf Bifurcation in Business-Cycle Theory . . . . . . . . 101
3.2.2.2. Closed Orbits in Optimal Economic Growth . . . . . . . . . . . 107
3.3. Local Bifurcations in Discrete-Time Dynamical Systems . . . . . . . . . . . . . . . 110
3.3.1. Fold, Transcritical, Pitchfork, and Flip Bifurcations . . . . . . . . . . . . . 110
3.3.2. The Hopf Bifurcation in Discrete-Time Dynamical Systems . . . . . 115
4. Chaotic Dynamics in Discrete-Time Economic Models . . . . . . . . . . . . . . . . . . . . . 119
4.1. Chaos in One-Dimensional, Discrete-Time Dynamical Systems . . . . . . . . 121
4.1.1. Basic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
4.1.2. Chaos in Descriptive Growth Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
4.1.3. Chaos in Discrete-Time Models of Optimal Economic Growth . . 143
4.1.4. Other Economic Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
4.2. Chaos in Higher-Dimensional Discrete-Time Systems . . . . . . . . . . . . . . . . . 149
4.2.1. Some Basic Ideas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
4.2.2. An Economic Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
4.3. Complex Transients in Discrete-Time Dynamical Systems . . . . . . . . . . . . . 157
4.3.1. Complex Transient Behavior in One-Dimensional Systems . . . . . . 158
4.3.2. Horseshoes, Homoclinic Orbits, and Complicated
Invariant Sets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
5. Chaotic Dynamics in Continuous-Time Economic Models . . . . . . . . . . . . . . . . . . 167
5.1. Basic Ideas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
5.2. The Coupling of Oscillators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
5.2.1. Toroidal Motion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
5.2.2. International Trade as the Coupling of Oscillators . . . . . . . . . . . . . 180
5.3. The Forced Oscillator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
5.3.1. Forced Oscillator Systems and Chaotic Motion . . . . . . . . . . . . . . . . . 183
5.3.2. Goodwinss Nonlinear Accelerator as a Forced Oscillator . . . . . . . 186

Contents

XV

5.3.3. Keynesian Demand Policy as the Source of Chaotic Motion . . . . . 187

5.3.4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
5.4. Homoclinic Orbits and Spiral-Type Attractors . . . . . . . . . . . . . . . . . . . . . . . . 192
5.4.1. The Shilnikov Scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
5.4.2. Spiral-Type Chaos in a Business Cycle Model with Inventories . . 195
6. Numerical Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
6.1. Spectral Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
6.2. Dimension, Entropy, and Lyapunov Exponents . . . . . . . . . . . . . . . . . . . . . . . 205
6.2.1. Phase Space Embedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
6.2.2. Fractal Dimensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
6.2.3. Correlation Dimension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
6.2.4. Lyapunov Exponents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
6.2.5. Kolmogorov Entropy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
6.2.6. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
6.3. Are Economic Time Series Chaotic? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
6.4. Predictability in the Face of Chaotic Dynamics . . . . . . . . . . . . . . . . . . . . . . . . 228
7. Catastrophe Theory and Economic Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
7.1. Basic Ideas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
7.2. The Kaldor Model in the Light of Catastrophe Theory . . . . . . . . . . . . . . . . 239
7.3. A Catastrophe-Theoretical Approach to Stagation . . . . . . . . . . . . . . . . . . . 241
8. Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
A.1. Basic Properties of Linear Dynamical Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
A.2. Center Manifolds and the Reduction of (Effective) Dimensions . . . . . . . . . . 264
A.3. A Brief Introduction to the Theory of Lags and Operators . . . . . . . . . . . . . . . 270
A.4. Numerical Simulations and Chaotic Dynamics in Theoretical
Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
Name Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315

Introduction

he 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
specic classes of economic models which are believed to be an optimal reection
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 scientic eld, a standard
collection of ideas, methods and concepts has to emerge over the decades which is
accepted by the majority of scientists in that eld and which is not easily vulnerable
to the challenge of fashionable and short-lived trends. These scientic 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 eld (e.g., consider the changes arising
in biology with evolution theory, or quantum mechanics revolutionary effect
in physics), scientic progress in economics seems to consist mainly in renements and/or modications (as sophisticated they may be) of accepted central
theories.
The formal apparatus of mainstream economics is borrowed from mathematics
and the natural sciences, especially from physics. Abstracting from the tight
connections 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 cen-

Introduction

tury. Classical and neoclassical economics emerged in a scientic 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 weltanschauung that characterized scientic thought in
many different disciplines at least until the turn of the century postulates a deterministic framework in which empirically observable phenomena follow strict and
well-dened laws comparable to Newtons 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 nd these immanent rules in economic 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 deterministically 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
elds on theoretical reections, economics obviously has not experienced incentives strong enough to necessitate any drastic modications of its formal apparatus
and conceptual framework. Furthermore, 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 experienced increasing efforts to diverge from their immanent heritage in the mechanistic weltanschauung, which continues to prevail in many other disciplines. While
qualitative 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 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 it 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
systems in experimental mathematics, physics, chemistry, and biology have been
promptly applied to economic dynamics, though these early works were surely out-

Introduction

side mainstream 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 theorys conceptualization of reality.
As was mentioned above, theories and concepts come and go in scientic life,
especially in elds 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 economic
dynamics can be determined only by scientic progress. In any case, chaotic dynamics constitute an exciting example of how complicated some dynamical systems may
be, although they may at rst 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
as often as possible.
The book is organized as follows: Chapter 1 attempts to demonstrate that the
general attitude of dynamical economics toward reality is an inheritance from the
mechanistic 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 eld which nevertheless is enlightening with respect to several of the topics enclosed in this book. Such a discussion seems to be mandatory when an attempt is made to evaluate the inuence of
complex dynamical systems on the determinism/indeterminism controversy dominating the science-theoretic literature during the rst half of the 20th century.
Chapter 1 also attempts to illustrate this worldview by a short survey of assumptions and methods in standard economic dynamics which generally can be coined
linear dynamics. The basic tools for analyzing nonlinear dynamical systems are introduced in Chapter 2. It includes topics like the Poincare-Bendixson theorem,
the uniqueness of limit cycles, and as an example of a conservative dynamical
system Goodwins predator-prey model of the class struggle, which can be transformed into a dissipative dynamical system under additional assumptions. Chapter
3 is devoted to a subject which is becoming more and more important in economic
dynamics, namely bifurcation theory. In addition to the renowned Hopf bifurcation, economic examples of other bifurcation types like the transcritical, fold, or ip
bifurcation are presented for discrete-time and continuous-time systems. Chapter
4 constitutes one of the two main chapters of this book. It contains an introduction to discrete-time, one-dimensional, chaotic dynamics and provides examples
of these strange phenomena from several economic sub-disciplines. The chapter concludes with a short outline of the emergence of strange dynamics in two-

Introduction

and higher-dimensional, discrete-time systems and a discussion of complex transient motion. The mathematically more sophisticated higher-dimensional chaos in
continuous-time models is presented in Chapter 5 which should be considered as
an outline of future research. It concentrates on standard scenarios like coupled
oscillator systems and forced oscillators. It also contains a discussion of spiral-type
chaos which might be a very long-lasting transient phenomenon. Chapter 6 deals
with the empirically most important question of establishing chaos in observed time
series. Chapter 7 then presents an outline of catastrophe theory whose relevance
to the advance of dynamical economics may not seem to be obvious but nevertheless merits special attention. Catastrophe theory represents a particular tool to
model the evolution of economies whose variables can be categorized as slow and
fast variables. Catastrophe theory permits to model sudden jumps in the evolution
of a variable in a completely endogenous fashion. A few concluding remarks are
contained in the nal Chapter 8. The book closes with an appendix that contains
some material which is either mandatory for an understanding of several concepts
introduced in the main text or which supplements some statements. It recalls basic
elements in the theory of dynamical systems, including the dynamic properties of
linear one- and two-dimensional systems in discrete and continuous time, different
approaches to the modeling of lag structures, and the use of operators in expressing these lag structures. It also contains a few warning remarks regarding the use of
numerical simulation techniques in investigating nonlinear differential equations.

Chapter 1

Economic Dynamics, Linearities, and the

Classical Mechanistic Worldview

onlinear economic dynamics may be considered just a collection of models

with essentially nonlinear ingredients that require the use of a particular set of
(relatively new) mathematical tools. As such, nonlinear economic dynamics has a
rank comparable to that of game theory, optimal control, or many other innovations
in economic theory made during the last 50 years. However, nonlinear dynamical
systems emerging in several elds have never been evaluated only from an exclusive
formal point of view. The potential complexity and impredictability of nonlinear
dynamical systems have almost immediately initiated a discussion of basic sciencetheoretic themes. Popular treaties of the subject occasionally talk of a scientic
revolution or employ similar spectacular expressions. However, it seems as if in
several examples of these inquiries the scientic environment which is supposed to
encounter such a revolution is not always described with a sufcient accuracy. The
following remarks do not (and cannot, actually) attempt to provide a completely
satisfactory account of the origin of economic theorizing and the extend to which
nonlinear dynamics might contribute to a change in the attitude toward economic
dynamic processes. The sole purpose of the following notes consists in encouraging
further reections on the role of dynamical systems in the modeling of dynamic
economic processes.
The rst section recalls a few original quotations from the ancestors of modern economic theory (with an emphasis on the dynamic aspects of economic theory). The overall imitation of physics methodology in the writings of 19th century
economists is demonstrated with several quotations from those authors who obviously felt obliged to justify their procedures. As the mechanistic worldview domi-

Chapter 1

nated the basic attitude toward life in those days, a more careful description and
evaluation of this worldview and the challenge it encountered at the beginning of
this century is presented in the second section. The chapter closes with a few reections on the resistance observable in the economics profession to a concentration
on nonlinear phenomena in economic dynamics.

1.1. Some Reections on the Origin of Economic Dynamics

Economics in its modern form was introduced as a serious and distinguished science during 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
rst successful approaches toward 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 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
It cannot have been the political and economic environment of the late 18th and
early 19th century alone which stimulated an interest in focusing research on economic 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 economic 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 conict with the emergence, popularization, and nal success of the enlightenment movement in the 18th
century. The enlightenments concentration on individualism, which laid the foundations 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
1

In many cases, inquiries into international trade represent the renowned work of classical writers; for example, most economists will probably remember David Ricardo
mainly for his investigations of comparative cost advantages rather than for his labor
value theory.

1.1. On the Origin of Economic Dynamics

probably the last generally educated and interested scholars in modern history) were
not only concerned with philosophical questions of Being but also strongly interested in the natural sciences. The enlightenment period of 18th century Europe
has gained favorable retrospective interest not exclusively due to its concentration
on human affairs, but also from its successes in the investigation of natural phenomena. Whereas scientic pioneers like Galileo, Kepler, or Descartes had to
recant their ideas or seek refuge, the 18th century was characterized 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.S. 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 inuenced, 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.
Abstracting from several spectacular 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 experiments outcome will remain
constant as well. The hypothetical possibility of repeating an experiment innitely
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 physical laws of motion constitute the essential dynamic principles of the entire cosmos. In reecting on the predictability question,
Laplace wrote the following, often quoted statement in 1776:
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

Chapter 1
determine the state of the system of these great bodies in past or future centuries, it sufces
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. 2

In principle everything therefore follows deterministic rules. Either the human

incapability or technical restrictions prevent a complete comprehension of actual
empirical phenomena. Laplaces demon represents a universal scientist who is not
limited by these technical and mental restrictions. It should be noted that this
demon is not a divine being but that in principle every human being can attain
to its capabilities. While a more detailed discussion of this attitude toward reality
can be found below, this attitude should tentatively be denoted as the mechanistic,
deterministic worldview.
The tremendous success of this 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 deterministic worldview and the attitude toward the predictability problem began to become
inuential in the social sciences as well. While, as was pointed out by Crutcheld et al. (1986), a direct application of Laplaces 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. Hegels philosophy
of history, and later Marxs 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 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/she 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 scientic 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
2

Quoted from Crutcheld et al. (1986).

1.1. On the Origin of Economic Dynamics

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 of fundamental behavioral laws from which
most results in economics follow tautologically, though usually not obviously.
This determination of fundamental behavioral patterns by hypotheses circumvented the basic problem of studying individuals acting within an economy and
cleared path toward a precise economic science, 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 century, 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.3 It seems as if the representatives of the Lausanne School
considered physics as a scientic 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 the engineering sciences.4 Walras repeatedly
mentioned his aim to structure economics in a manner similar to physics5 and
claimed that the classical and pre-classical writers were already implicitly guided by
the same idea:
...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. ... Isnt 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 difculties and without complete success. ... I...have been concerned
with the development of pure economics as a physico-mathematical science for several
years. 6
3

Standard references for questions concerning the relation between physics and economics include, for example, Georgescu-Roegen (1971) and Mirowski (1988).

V. Pareto had a doctoral degree in railroad engineering and, like his predecessor L.
Walras in Lausanne, had not published much on economic theory when he got his rst
academic appointment. However, Debreus (1986) statement that Walras and Pareto
had published only novels and other belletristic literature before their rst appointments is misleading.

In a rather enthusiastic fashion, 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 (H.-W.L.)
from the German preface to Walras (1876)

Walras (1874), p. 7. Own translation (H.-W.L.) from Walras (1876).

10

Chapter 1

In an even more pointed style, Jevons (1871) associated the survival of economics
with its use of mathematics:
It is clear that Economics, if it is to be a science at all, must be a mathematical science.7

I. Fisher wrote in his 1891 doctoral thesis:

Scarcely a writer on economics omits to make some comparison between economics and
mechanics. One speaks of a rough correspondence between the play of economic forces
and mechanical equilibrium. ... In fact the economist borrows much of his vocabulary
from mechanics. Instances are: Equilibrium, stability, elasticity, expansion, ination,
contraction, ow, efux, force, pressure, resistance, reaction, distribution (price), levels,
movement, friction. 8

Walras, like Pareto, Cournot, and other early mathematical economists, attempted to develop a logically consistent edice 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 modeling 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 scientic economics. As was mentioned above,
the deterministic, mechanistic worldview of physics in the 19th century dominated
not only the internal scientic community but also had a widespread inuence
on other disciplines and also on the public weltanschauung. Much in the spirit of
Laplaces statement, economic systems were therefore interpreted 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.S. Mill, originally published in 1843, which shows
that physics was not only favored by mathematically educated scholars like Walras
or Pareto:
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 persons modes of thinking, feeling, and
acting, do not depend on causes; ... (T)he impressions and actions of human beings are
7

Jevons (1871), p. 3.

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 Economic Dynamics

11

... the joint result of (the) circumstances and of the characters of the individuals: and
the agencies which determine human character are so numerous and diversied, ... , 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 veried. ... For the purposes of political and social science
this is sufcient. 9

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.10 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 eld is concerned) is not physics but biology
... the forces of which economics has to take account are more numerous, less denite,
less well known, and more diverse in character than those of mechanics. ... economics,
like biology, deals with a matter, of which the inner nature and constitution, 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 banking, of trade unionism or cooperation, 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 moral strength of character
and habits of mutual trust. But often the explanation is more difcult. 11

Other authors searched for analogies with even other disciplines. Menger (1871)
described his marginal utility concept just as a difcult as yet untreated topic in
psychology.12 Edgeworth (1881) called one of his master pieces Mathematical Psychics. It should be noted that these inuences have not always been uni-directional:
the American psychological school adopted several ideas developed by Edgeworth.
This construction of analogies between different sciences is usually called reductionism in the science-theoretic literature. A scientic procedure is called reductionistic if basic properties of a particular sciences study object are derived with the help
of another sciences methodology and existing knowledge. When the statements
of classical mechanics are indeed generally valid and if the deterministic worldview
prevails, all scientic questions (in all elds) can consequently be treated with the
help of the principles of physics. The standard, hierarchical reduction scheme in
Table 1.1 which covers only a few interesting sciences is due to Medawar (1969) and
9

Mill (1973), pp. 847f., emphases in original. For the purpose of this little excursion
into the history of science, Mills Logic can be considered the gap lling contribution
between enlightenment philosophy, the methodology of the subsequent development
of classical mechanics, and the methodology of economics and other social sciences.

10

Compare, e.g., Blaug (1978), p. 311, for the resistance to the emerging mathematical
methods among well-reputed economists.

11

Marshall (1938), p. 772. Compare also Hodgson (1993) for a recent discussion of
Marshalls attitude toward biology.

12

Menger (1871), p. 94. Own translation (H.-W.L.).

12

Chapter 1

describes economics as a science which can be treated with biological principles.

Biology itself is nothing else than a particular investigation of the working of basic
chemical processes and, nally, physics describes the essential relations inherent in
all observable phenomena.
A consequent application of this reduction scheme implies that the elds
4. Economics
2.-4. do not possess a real right to ex
ist as self-sustained sciences. If the con3. Biology
stituting properties of a particular eld

can be described with the help of the

2. Chemistry
methods and qualitative results of sci
ences situated in front of it, this eld ob1. Physics
viously does not possess those essential
properties which could justify the difThe Reduction Scheme in the
ferentiation as a separate science. The
Deterministic Worldview
subject of reducible sciences appears as
Source:
Medawar (1969), pp. 15ff.
a specic application of the more genTable 1.1
eral science in the scheme.
It might be suspected that the scientic reductionism was a historic phenomenon that does not have a serious recent relevance. However, modern elds in the
natural sciences like molecular biology reduce biological phenomena to chemical
processes. Parts of evolutionary economics emphasize the biological principles of
natural selection.13 Finally, if the above mentioned discussion of the analogy between the methodology of physics and economics appears just as a historic anecdote
dating back to the last century the reader should compare Jojima (1985), Sebba
(1953), or Thoben (1982) for an indication that the discussion is still going on
(although this happens to take place somewhere at the outskirts of mainstream
economics).
Aside from this general recalling of reductionism as a procedure which is not
too uncommon in the history of sciences and the few critical remarks that emphasize analogies to other sciences than physics, Marshall, Menger, Jevons and
most contemporaries nevertheless considered physics as the science which can serve
as a paragon in respect to both the formal apparatus and the involved worldview
in economic theorizing. Marshalls general understanding of economics as a
sub-discipline of natural philosophy and especially Walras concentration on the
mathematical methodology have, in the scientic spirit of the last century, survived
in mainstream economics until today. A majority of the topics covered by modern
mathematical economics, especially in the general equilibrium framework, still deal
with the same problems which interested classical economists like Walras, and it is
this tradition inherited from the classical writers, which still allows one to assign the
term mechanistic worldview to most economic approaches. Though this term is
often quoted (mainly among critics of neoclassical economics) it nevertheless seems
useful to investigate it more carefully. It will turn out that the common association
13

Compare also the standard discussion on reductionism in modern evolutionary biology

itself. Cf. Dawkins (1987).

1.2. The Deterministic Worldview and Deterministic Theories

13

of this term with determinism in a most general sense cannot cover all facettes of
the relevant, basic science-theoretic discussion. Without a more elaborated discussion of the relevant terms it seems to be impossible to evaluate the above mentioned
statements that nonlinear dynamics tackles basic science-theoretic foundations of
several disciplines.

1.2. The Deterministic Worldview and Deterministic Theories

In the light of the discussion in the previous section classical physics has played a
prominent role in the emergence of the deterministic worldview. It is thus useful to
recall the standard paradigm governing research in physics and most other natural
sciences roughly until the end of the 19th century.14
A physical phenomenon can be isolated from the environment. The study of the
isolated (or de-coupled) physical systems and processes (for example in laboratory experiments) can provide a precise understanding of the problems nature.
The abstraction from noisy surroundings during this isolation may reveal the
pure properties of a physical system.
Laboratory experiments can be repeated as often as desired. In these experiments constants can be derived which permit the formulation of laws of nature.
These laws have an arithmomorphic character, i.e., they can be formulated in mathematical terms and follow the standard mathematical rules.15
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. 16
If it is not possible to properly analyze all constituent elements of a given system,
perturbing an existing linear model (which was constructed by superposition)
can always explain the originally disregarded phenomena.

The paradigmatic attitude toward the study object expressed by the above list can
be called the mechanistic worldview. Georgescu-Roegen (1971) summarizes this
paradigm as follows:
...a science is mechanistic if, rst, it assumes only a nite number of qualitatively different
elements, and if, second, it assumes a nite number of fundamental laws relating these
elements to everything else in the same phenomenal domain. 17

Other terms can be used in characterizations of the paradigm. West (1985) identies the procedure expressed in the aforementioned list with a linear science:
14

Cf. West (1985), for a longer discussion.

15

Cf. Georgescu-Roegen (1971), p. 44, for an intensive discussion of the term.

16

Cf. West (1985), p. 70 .

17

Georgescu-Roegen (1971), p. 115.

14

Chapter 1
Physical reality could therefore be segmented: understood piece-wise and superposed back
again to form a new representation of the original system. ... Thus the philosophy was to
solve the linear problem rst, then treat the remaining interaction (that was not treated
quite properly) as a perturbation on the linear solution, assuming throughout that the
perturbation is not going to modify things signicantly. 18

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 phenomenon by Newton, Lagrange, and Laplace, or the ndings 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.19
Classical economic writers incorporated this procedure in analyses of economic
behavior. The following items appear as the most important properties of (neo-)
classical economic analyses in the present context:
Individual behavior (or the behavior of individuals in an economic unit like a
market) 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 comparable to the physical laws of motion, it is
both regular and predictable. If the environment is known with precision, 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 the behavior of a society as a whole does
not differ from the sum of the individual actions.

This 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 nonadditive interdependence between different individuals and/or actions, etc. A lot
of progress has been made since the days of the classical (neoclassical) writers with
respect to the above mentioned and other limitations, but the dynamic aspects of
the theory are still more or less characterized by the same concentration on linear
relations as was the case during the rst formalizations of the development of an
economy over time.
At the turn of the century physics began to experience a basic revolution (the
use of the term seems to be undisputable for a description of that event). Quantum
mechanics and later relativity theory constituted a challenge to the dominating
classical mechanistic paradigm. It was demonstrated in the subsequent years that
classical mechanics was only an approximation to those phenomena that happen
18

West (1985), p. 70

19

Cf. West (1985), pp. 68 ff., for a short survey. It is remarkable that Euler personally
rejected the superposition principle though he actually proved its correctness in the
case of the wave equation.

1.2. The Deterministic Worldview and Deterministic Theories

15

to take place on a scale immediately observable by human beings. Heisenbergs

quantum mechanics with the unsharpness relation and Schrodingers equations have
demonstrated that the best that can be done in many cases is to provide a stochastic
description of possible phenomena.20 The conict between this newly emerging
paradigm and Laplaces determinism is obvious.
The basic indeterminism (in the classical sense) of phenomena on the molecular as well as the cosmic layer initiated a long discussion in the science-theoretic
literature on the relevance of the mechanistic worldview. When phenomena are
essentially indeterministic it can obviously be doubted whether the formulation
of deterministic, arithmomorphic laws of nature makes any sense at all. Stochastic
descriptions of reality may be considered the only meaningful approach to explanations of physical phenomena. Alternatively, it might be supposed that deterministic
laws of nature represent good approximations of reality on that scale immediately
observable by human beings. It turns out that a rough distinction between determinism and indeterminism is not extremely well-suited for a discussion of the relevance of the deterministic worldview. Popper (1982) thus distinguished between
scientic determinism and a deterministic theory.21
The doctrine of scientic determinism is the doctrine that the state of any closed physical
system at any given future instant of time can be predicted, even from within the system,
with any specied degree of precision, by deducing the prediction from theories, in conjunction with initial conditions whose required degree of precision can always be calculated
(in accordance with the principle of accountability) if the prediction task is given. 22

The scientic determinism can therefore be interpreted as a deterministic worldview

which is exclusively based on empirical knowledge collected in the form of scientic
activity. In contrast, Popper denes a deterministic theory (a prima facie deterministic
theory) as follows:
A physical theory is prima facie deterministic if and only if it allows us to deduce, from
a mathematical exact description of the initial state of a closed physical system which
is described in terms of the theory, the description, with any stipulated nite degree of
precision, of the state of the system at any given future instant of time. 23

The distinction of the two terms is useful for two reasons. The scientic determinism (i.e., the mechanistic worldview in Georgescu-Roegens term and Laplaces
sense) does not necessarily result in the construction of deterministic theories. It
20

Even the motion in (usually) simple devices like mechanical clocks (which occasionally
appear as the incarnation of the mechanical approach) might be called indeterministic
when the molecular layer is considered instead.

21

The reference originally constituted a postscript to the English translation of his Logic
of Scientic Discovery, rst published in German in 1934, which has had a major impact
on the methodology of all social sciences, including economics.

22

Popper (1982), p. 36. The principle of accountability states that it is possible to determine
the required precision of initial points for a desired precision in the predictions.

23

Popper (1982), p. 31.

16

Chapter 1

will become obvious from the material presented in subsequent chapters that dynamical systems which reect the deterministic worldview, i.e., equations without
any stochastic elements, might not constitute deterministic theories. An example
Scientic Determinism

Deterministic Theory

For each phenomenon:

For each mathematically

describable phenomenon:

initial values with

innite precision

initial values with

nite precision

prediction with
innite precision

prediction with given

mathematical precision

Poppers Distinction between the Deterministic Worldview and a Deterministic Theory

Table 1.2

is the famous three-body problem: although the basic laws of motion are precisely
given, the motion of three or more bodies with special mass constellations in space
cannot be calculated with an arbitrary precision. Thus, Newtonian mechanics cannot be called a deterministic theory in the sense of Poppers denition while it
certainly reects a deterministic worldview.24 Without a distinction between the
two terms, Newtonian mechanics should be called indeterministic; obviously, this
would contradict the self-assessment of classical authors. Alternatively, even if the
deterministic worldview prevails theoretical investigations of particular phenomena
do not necessarily have to make use of deterministic theories. The inuence of human incapabilities have already become obvious from Laplaces statement; only
his demon is able to comprehend the actually innite numbers of freedom. Thus,
stochastic descriptions of reality may constitute sufciently accurate approaches to
physical phenomena.
A second justication for the distinction can be seen in the idea that an indeterministic worldview is not necessarily irreconcilable with the use of deterministic
theories. First, an indeterministic worldview does not exclude the possibility that deterministic niches exist which can be treated with the help of deterministic theories.
Second, a deterministic theory can serve as an approximation of those phenomena
which actually should be considered indeterministic. The success of Newtonian
mechanics in calculating the motion of known celestial bodies is not diminished by
the fact that on the molecular layer the motion is indeterminate. This seems to be
particularly relevant for economics when economic models are considered thought
experiments instead of precise pictures as close to reality as possible.
Poppers (1982) distinction between scientic determinism and a deterministic
theory is useful when classical mechanics and all reduced sciences are considered
the standard references for deterministic theories. Poppers main contribution
24

Popper himself has another view on this last statement, cf. Popper (1982), p. 31.

1.2. The Deterministic Worldview and Deterministic Theories

17

in this context probably consists in his provision of incentives to concentrate on

stochastic approaches in the social sciences. It does not seem to be quite clear
what kind of appearance such stochastic descriptions of economic phenomena
should have. However, it seems as if descriptions of, e.g., consumer behavior entirely in terms of well-dened preferences and deterministic environments without
any stochastic inuences contradict Poppers anticipation of an indeterministic approach to economic phenomena.
The critique of the deterministic worldview in economics refers to those parts of
mainstream economics whose scientic origins date back to the late 19th century.
Indeed, while neoclassical economists were still arguing in terms of mainstream
classical mechanics, a new way of thinking eventually emerged in the natural sciences which involved a drastically different attitude toward reality. Around the turn
of the century, advances made in the natural sciences and mathematics raised another doubt to the validity of the mechanistic worldview. While the development of
relativity theory or quantum mechanics with its unsharpness relation constituted a
challenge to the deterministic worldview, the discovery of mathematical properties
of several dynamical systems represented a challenge to the deterministic theory itself.
It was shown that problems can emerge in predicting the evolution of dynamical
systems which are completely deterministic in the sense that no stochastic elements
are involved in the denition of the system. It should be noted that the relevance
of new developments in mathematics and physics either went unrecognized by the
majority in the physics profession or was considered to be only marginally signicant to mainstream science. Thus, with mainstream science still elaborating on the
classical mechanistic 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:
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 nal phenomenon.
A small error in the former will produce an enormous error in the latter. Prediction becomes
impossible, and we have the fortuitous phenomenon. 25
25

Poincare (1952), p. 76. Originally published in Poincare (1908), p. 68. I am grateful

to D. Farmer for providing this reference to me.

18

Chapter 1

The very essence of Poincares statement was not immediately realized in the mathematics community, though his work not only initiated research in several dynamic
phenomena but even still constitutes a challenge to recent mathematicians. Fatou
(1919) and Julia (1918) made important observations about the behavior of iterated complex maps, but it took nearly fty years before some of the basic results of
Poincares work were exploited in a pioneering, but generally unnoticed work of
E.N. Lorenz (1963). His inspection of a dynamical system in the context of a meteorological phenomenon impressively demonstrated the conceptual impossibility
of precisely predicting a dynamical systems future development without an absolutely precise knowledge of the system parameters and the initial values of the state
variables. 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 scientic trend.26
An immediate consequence of the results obtained in studying nonlinear dynamical systems consists in the need for a revision of Poppers distinction between
scientic determinism and deterministic theories. Poppers concept of a deterministic theory is based on the mathematical properties of basically linear dynamical
systems. When nonlinear dynamical systems do not possess the predictability property known from established linear deterministic systems, deterministic theories
(i.e., arithmomorphic theories without any stochastic components) have to be distinguished according to their possible output. Deterministic theories can behave
Scientic
Determinism

Deterministic
Theories

For each
phenomenon

For linear and

quasi-linear systems

For chaotic nonlinear systems

initial values with

innite precision

initial values with

nite precision

initial values with

nite precision

prediction with
innite precision

prediction with
given mathetical precision

prediction only
for short time
intervals

A Revision of Poppers Distinction in the Light of Nonlinear Dynamical Systems

Table 1.3

in the way described in the Popperian scheme. When their behavior does not essentially differ from the behavior of linear systems they will occasionally be called
26

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, relaxation 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.

1.3. The Dominance of Linear Dynamical Economics

19

quasi-linear dynamical systems. However, it cannot be excluded that deterministic theories behave in an indeterministic fashion: although the functional form of
the systems is completely deterministic (i.e., without any stochastic components),
the nite precision in the initial values is responsible for the fact that prediction
over more than a very short time interval is impossible. These complex nonlinear
dynamical systems thus require a revision of Poppers scheme (cf. Table 1.3).
The theoretical and empirical research in several disciplines, mainly in the natural sciences, has concentrated on the investigation of nonlinear systems during
the last two decades. While nonlinear approaches have occasionally been enthusiastically adopted in some disciplines, economics (at least mainstream economics)
seems to be characterized by a general hesitancy 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 scientic community became aware of the importance of those nonlinearities.27 It is noteworthy, however, that the impetus for the
study of nonlinear dynamical systems 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 concentrates on linear models though the foundations of nonlinear economics were
laid more than forty years ago.

1.3. The Dominance of Linear Dynamical Systems in Economics

A continuous-time dynamical system is called a linear system when it can be written
in the form
t) = Ax(t) + c,
x(

x, c Rn ,

t R,

(1.1)

t) =
with x(t) as the n-dimensional vector of state variables at the point in time, t, x(
dx(t)/dt as the vector of time derivatives of the state variables, A as an n n matrix
of constant coefcients, and c as an n-dimensional column vector of constants.
Analogously, a discrete-time dynamical system is called a linear system when it can
be written in the form
xt+1 = Axt + c,
27

x, c Rn ,

t Z,

(1.2)

Cf. Harcourt (1984) or Velupillai/Ricci (1988) for honory lectures on Goodwins

work.

20

Chapter 1

with xt as the vector of state variables in the discrete period t, and A and c dened
as above. The solution of these dynamical systems for low values of n and a brief
survey of a few stability criteria are contained in the Appendix A.1. The basic
dynamic properties of these systems relevant for this section are the following:
Abstracting from a few exceptional examples, linear dynamical systems possess
only single xed points (equilibria). It follows that global and local analyses of
the dynamic behavior coincide.
The xed points of linear dynamical systems belong to one of the following
categories: 1) stable/unstable nodes (monotonic convergence/divergence to/
from the xed point), 2) stable/unstable foci (monotonic oscillations toward/
away from the xed point, 3) centers, or 4) saddle points.

Center dynamics occur only for particular, numerically precise parameter constellations and usually become relevant only in descriptions of limit cases. Unstable nodes
and foci imply the eventual motion of the state variables toward innity. Thus, if an
economists task is to model the bounded motion of an economy with the help of
linear dynamical system, stable nodes and foci represent the appropriate types of
xed points. Several economic applications (including perfect foresight models,
for example) concentrate on saddle points because the motion along the stable
manifold (cf. the horizontal dashed lines in Figure A.1.f) represents the unique
path toward the xed point.
In the face of the various types of dynamic behavior outlined in the rest of this
book linear dynamical systems are thus able to describe only a small number of dynamic phenomena. As linear systems dominate dynamical economics, the question
arises what the reasons for this concentration on a limited set of hypothetically possible dynamic phenomena are. Basically, two possible answers to this fundamental
question can be distinguished.28
i) Compared with some branches of the natural sciences, economics has lagged
behind in the technical as well as the methodological aspects of scientic work.
ii) Economics is characterized by a paradigmatically motivated concentration on
xed points (equilibria), to the point that other dynamic phenomena than the
stability of these xed points are ignored though they are at least known to exist
in the formal mathematical literature.
In the following, both complexes will shortly be discussed in separate sub-sections
though they are actually immanently identical.
ad i)
West (1985) distinguishes ve stages of scientic progress:29
Stage 1: Verbal description of the subject and the immanent logic of the problem.
28

Of course, other pragmatic reasons cannot be excluded. Compare, for example, the
enlightening introduction in Boldrin/Woodford (1990).

29

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

1.3. The Dominance of Linear Dynamical Economics

21

Stage 2: Formal identication of the problem and quantication of the mathematical relations.
Stage 3: Consideration of the dynamic aspects of the mathematical model in the
form of linear dynamical systems.
Stage 4: Re-consideration of the basic scientic principles and testing whether
models in stage 3 can represent all mentally possible phenomena. Establishment of the need to include nonlinear aspects in dynamical models.
Stage 5: Development of complete nonlinear models, which are indeed able to
explain the phenomena outlined in the general reections in stage 1.
It is possible to assign distinguished economists to the different stages of scientic
progress according to this rough classication: the classical writers like Smith,
Ricardo, Malthus, etc. dominate the rst stage. Stage 2 is occupied by neoclassical
economists like Marshall, Walras, Pareto and others, who also bridged the gap
to the third stage of scientic 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 economics.
The recent theoretical attempts to demonstrate the possibly drastic divergence in
the behavior of nonlinear models from linear ones raise questions concerning the
general validity of the standard linear and mainstream thought experiments.
A general, nonlinear, dynamic, economic theory representing stage 5 is therefore obviously not in sight. While other sciences are also still far away from a
complete realization of the programme, it seems as if nonlinear phenomena 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. 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 justication of the use of linear
dynamical systems.
ad ii)
The concentration on linear dynamical systems in economics is usually justied (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.30
30

Usually, this simplication goes hand in hand with the prospect of future research in
which the inuence of nonlinearities should be investigated. Compare also Baumol
(1987), p. 105, for a discussion of this procedure.

22

Chapter 1

This simplication can certainly be justied 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) sufciently good approximation of the systems
true behavior. However, in higher-dimensional systems it will become increasingly
difcult to discriminate between 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 dynamic behavior
of the system.
It may be that some economists are not aware of the potential qualitative differences between 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 Sections 1.1 and 1.2, then there is
indeed no need to consider anything other than linear systems. The fact that linear dynamical systems behave in a very regular fashion and that the most complex
dynamic behavior, namely steady regular oscillations, can be modeled only by assuming a numerically exact parameter constellation support the basic idea that an
economys equilibrium is asymptotically stable. In addition, the dynamic behavior
is predictable. A model which demonstrates the impossibility of predictions can
be considered to be part of a negative theory in economics: when the provision
of predictions is regarded a justication for the mere existence of economics several nonlinear dynamic models will certainly be treated very skeptically (and their
destructive effects will be emphasized).
Consequently, as can be expected, the different scientic 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. The assumption of linear
dynamical systems in these classical models is often justied by technical reasons:
The predominant technical requirement of econometric work which imposes rational expectations is the ability to write down analytical expressions giving agents 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 whether for explaining the central
features of the business cycle there will be a big reward to tting nonlinear models. 31

This opinion will probably not be shared by every Rational Expectations theorist
but it implicitly uncovers the ignorance of the importance of nonlinear phenom31

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

1.3. The Dominance of Linear Dynamical Economics

23

ena. In fact, former schools in equilibrium economics were not all characterized
by this limited methodological point of view. The literature that concentrated on
the properties of tatonnement processes in a general equilibrium context in the
1950s and 1960s 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. Nearly all contributions concentrated on the question which
assumptions are necessary and/or sufcient 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 nonlinearities were considered whose implied behavior
is sufciently close to that of linear systems.
Concentration on linear dynamical structures implies a conceptual problem
which becomes evident 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 linear 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 New Classical Macroeconomics overcomes this problem by introducing stochastic exogenous disturbances in basically linear dynamical structures.32 An
economy isolated from its surrounding is believed to behave in a regular fashion,
i.e., if it is displaced from its xed point it returns toward this state in the form of
a monotonic or regularly oscillating motion. The observed irregularity in actual
economies time series can then be explained by the inuence of random terms,
which do not necessarily have any purely economic meaning.33 When superimposed stochastic disturbances take place in every period in discrete-time systems
(or at each point in time in continuous-time systems) an interesting phenomenon
can be observed in these systems. When the deterministic part of the model implies
oscillations with monotonic decreases in the amplitude, i.e., when the xed point
is a stable focus, the introduction of the disturbances generates persistent uctuations. Figure 1.1 attempts to illustrate this phenomenon. A linear, discrete-time,
dynamical systems generates the continuously drawn time series of one of the two
state variables. The oscillation is dampened and x1 converges toward its xed-point
value. The dotted line represents the time series generated by the same deterministic system but with superimposed, normally distributed, stochastic disturbances.
The time series displays persistent uctuations. Remarkably, the system generates
up- and downswings of the time series which prevail for several periods; the introduction of permanent stochastic disturbances therefore does not simply imply a
positive or negative offset of the deterministic time series with the magnitude of the
stochastic term.34
32

Compare also Brock (1991) for a discussion of the standard macroeconomic (macroeconometric) approach in the New Classical tradition.

33

The observation that the inuence 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).

34

This effect has actually been known for a long time in the economic dynamics literature,
cf. Samuelson (1947), pp. 335ff.

24

Chapter 1

x1

Time
Persistent Oscillations in a Stochastic Linear Dynamical System
Figure 1.1

It can be argued that assuming these linear structures with superimposed stochastic inuences is justied when actual time series do not suggest a falsication
of this hypothesis. However, it was demonstrated by Blatt (1978, 1980, 1983)
that statistical procedures may be misleading in discriminating between linear and
nonlinear structures. Suppose that a time series is generated by a linear dynamic
model with stochastic inuences. It can be expected that a linear regression will
t the data extremely well. On the contrary, suppose that a time series is generated by a deterministic nonlinear model. It is not immediately clear that a linear
regression will reject the hypothesis of a linear structure with stochastic inuences.
Blatt (1983) performed the following experiment:35 consider the discrete-time,
multiplier-accelerator model of Hicks (1950) with ceiling and oor.36 The model
is nonlinear because the ceiling (the maximal growth path) and the oor (the minimal growth path determined by autonomous investment) constitute upper and
lower bounds to the endogenous uctuations. It is crucial to the nonlinear version of the Hicks model that the endogenous (linear) uctuations are exploding.
Blatt assumed the following parameter specications in the endogenous part of
the Hicks model, i.e., the second-order difference equation
Yt = C0 + I0 + (c + )Yt1 Yt2
= 25.0 + (0.75 + 1.5)Yt1 1.5Yt2 ,

(1.3)

with c as the marginal propensity to consume and as the accelerator. The values of
the parameters in (1.3) imply exploding oscillations. A time series generated by the
deterministic nonlinear model, i.e., equation (1.3) with upper and lower bounds,
was investigated by postulating the linear stochastic equation
Yt = A + (c + )Yt1 + Yt2 + ut .
35

Compare also Brock (1988b) for a discussion of Blatts results.

36

Cf. Gabisch/Lorenz (1989), pp. 49ff., for a description of the model.

(1.4)

1.3. The Dominance of Linear Dynamical Economics

25

Surprisingly, this linear lagged model ts the data of the nonlinear model sufciently well. Standard statistics for the model are
Yt = 28.5 + (0.713 + 0.887)Yt1 .887Yt2

(R2 = 0.92,

DW = 2.17,

H = 0.56)

(1.5)

with H as the alternative Durbin statistics. The estimated value of the accelerator is
lower than 1, indicating that the economy is inherently stable though the underlying
dynamical system (1.3) 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 economic dynamics have been investigated mainly by
economists who felt uncomfortable with the classical paradigm of equilibrium economics. Most contributions to nonlinear economic dynamics in the postwar era are
therefore credited to authors usually assigned to post-Keynesianism, neo-Keynesianism, neo-Ricardianism, etc., though these contributions did not always make use
of the mathematical advances in dynamical systems theory of the day. However,
it would be misleading to attribute research in nonlinear economic dynamics exclusively to these schools. Nonlinearities have played a particular role in several
elds 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 elds. Most
interestingly, recent work on the effects of nonlinearities in the standard domain
of mathematical economics, namely the general equilibrium analysis, is becoming
more and more important.
Oscillatory motion of economic variables has almost always been identied with
uctuations observable in capitalist, market-oriented, Western economies. The idea
that phenomena like investment cycles could have been an empirical fact in the
former socialist East European countries usually did not come to mind. However,

recent work by Brody/Farkas

(1987) and Simonovits (1991a,b) indicates that
such cycles were at least theoretically possible in socialist economies. It seems as
if the emergence of oscillatory behavior in dynamic economic systems cannot be
excluded per se in models of various economic schools.

Chapter 2

Nonlinearities and Economic Dynamics

f the world is not linear (and there is no qualitative reason to assume the contrary), it should be natural to model dynamic economic phenomena in the form
of nonlinear dynamical systems. 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 dynamic 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 many low-dimensional systems, the effects of nonlinearities in
higher-dimensional systems cannot always be anticipated with preciseness, implying
that linear approximations should be treated with skepticism 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 nonlinear dynamical system anymore, i.e., to provide an explicit expression that
delivers the value of a variable at a specic point in time when an initial value is
given.1 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 orbit or displays related dynamic
phenomena. Occasionally it is also possible to exclude the occurrence of some
phenomena typical for nonlinear dynamical systems. In these cases linear approx1

It should be noted that the same is actually true for high-dimensional linear systems
where computational difculties usually preclude the determination of a solution.

27

2.1. Preliminary Concepts

imations can provide a sufciently 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. Although it is exclusively dened for the two-dimensional case, the PoincareBendixson theorem has become one of the most popular tools in analyzing nonlinear dynamical systems. The power of this tool will be demonstrated through the
presentation of economic examples from standard Keynesian business-cycle theory
and simultaneous price-quantity adjustment processes. 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. An example
of a so-called conservative dynamical system is provided through a presentation of
Goodwins (1967) model of the class struggle, which in terms of dynamical systems
theory is an example of a so-called predator-prey system. The chapter closes with a
short section on relaxation oscillations, i.e., a particular type of dynamic behavior that
emerges when the adjustment speed of one of the state variables is very large, and a
few remarks on the irreversibility phenomenon observable in dissipative dynamical
systems.

2.1. Preliminary Concepts

In this chapter, only continuous-time dynamical systems will be discussed.2 Most of
the following concepts can be transformed to the case of discrete-time dynamical
systems. Consider the n-dimensional, ordinary differential equation system dening the motion of the state variables xi , i = 1, . . . , n 3
x 1 = f1 (x1 , . . . , xn ),
..
.
x n = fn (x1 , . . . , xn ),

(2.1.1)

or, in vector notation,

x = f(x),

x W Rn ,

(2.1.2)

with W as an open subset of Rn and a dot over a variable denoting the operator
d/dt. The functions fi , i = 1, . . . , n are usually assumed to be C . Differential
equation systems like (2.1.1) describe vector elds in W, i.e., for each x W the
dynamical system unambiguously determines the direction and the speed of change
of that point. Figures 2.1.a and 2.1.b depict two examples
of vector elds in the


plane. A solution curve, trajectory, or orbit is dened as t x(0) , i.e., when a certain
2

A discussion of the advantages and disadvantages of different time concepts will be

avoided in this book. Cf. Gandolfo/Martinengo/Padoan (1981) for a discussion.

The dependence of the variables on t will be ignored for notational convenience.

28

Chapter 2

2.1.a

Stylized Vector Fields in R2

Figure 2.1

2.2.a

2.1.b

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


x(0) is given, t x(0) provides the values of x at t (cf. Figure 2.2.a). The ow
t (x): Rn Rn of system (2.1.2) describes the future development of all x(0) W
(cf. Figure 2.2.b with t0 , t1 , and t2 as distinct points in time, t R).
Central in the discussion of nonlinear dynamical systems is the notion of an attractor. There exist subtle differences between different denitions of an attractor
in the literature; the following denition should be understood as a working definition. An attractor is an example of an invariant set with specic properties. A
set D Rn is invariant for the ow t (x) of a system like (2.1.1) if t (x) D for
x D t R.4
4

A set is called a positive invariant set if it is invariant for t 0. If it is invariant for t < 0,
it is said to be negatively invariant. Cf. Wiggins (1990), p. 14.

29

2.1. Preliminary Concepts

Denition 2.1:5 A closed invariant set A W is called an attracting

set if there is some neighborhood U of A such that t (x) U t 0
and t (x) A when t for all x U.
A repelling set is dened by letting t in Denition 2.1. An attracting set is
therefore a set to which trajectories starting at initial points in a neighborhood of
the set will eventually converge. The set of all initial points which are attracted by
A is called the basin of attraction of A.
Denition 2.2: Let U be a neighborhood of an attracting set A. The
basin
of attraction B(A) is the stable manifold of A, i.e., B(A) =


t (U).
t0
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.

2.3.a

Basins of Attraction of Attracting Sets A

Figure 2.3

2.3.b

In most parts of this book the term attracting set will be identied with an
attractor. However, it should be noted that the expressions can be distinguished.
An attractor can be dened as a topologically transitive attracting set.6
Attracting sets can often be detected by locating a trapping region (cf. Wiggins
(1990), p. 43):
5

Cf. Guckenheimer/Holmes (1983), p. 34, or Wiggins (1990), p. 43.

A closed invariant set is said to be topologically transitive if, for any two open sets U,
V A there exist t0 > 0 such that t (U) V =
 t > t0 , cf. Wiggins (1990), p. 45,
and Ruelle (1989), p. 151f. Examples showing that an attractor may be only a subset
of an attracting set can be found in Eckmann/Ruelle (1985), p. 623. Compare also
Wiggins (1990), pp. 44f.

30

Chapter 2

Denition 2.3: A closed, connected set D is a trapping region if

t (D) D t 0 or, equivalently, if the vector eld on the boundary
of D is pointing toward the interior of D.

The intersection t>0 t (D) of all trajectories in D is then an attracting set. Trapping regions can be identied with the help of Lyapunov functions which will be
introduced later in this section.
Consider an initial point that does not belong to an attractor, i.e., x(0)  A, and
suppose that the trajectory starting at x(0) eventually approaches the attractor. The
part of the trajectory t (x(0)) which is not yet on the attractor is called a transient.
Transients may exhibit wild behavior in the initial phase of the convergence toward
an attractor.

2.4.a

2.4.b
Wandering and Non-Wandering Points
Figure 2.4

The motion on transients and on attractors can also be distinguished by introx(0) is non-wanducing the notion of wandering and non-wandering sets.
7 A point

dering under the ow t (x) if for any neighborhood U x(0) , there exists a t0 0
such that t (U) U = for t > t0 , i.e., a trajectory starting in an arbitrary neighborhood of x(0) 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 xed
points and stable limit cycles (to be introduced below). Points on transients and on
trajectories diverging from repellers are examples of wandering sets. Figure 2.4.a
shows an example of a wandering point x(0). In order to be a non-wandering point,
any neighborhood U of the initial point must fulll the above mentioned requirement in the denition of such a point. However, it is trivial to nd a neighborhood
(the shaded area) with the property that a trajectory leaving the neighborhood
never returns to this set. Thus, x(0) in Figure 2.4.a is a wandering point. Figure
7

Cf. Guckenheimer/Holmes (1983), p. 236.

2.1. Preliminary Concepts

31

2.4.b shows an example of a non-wandering point. The motion takes place on the
closed curve in a continuous fashion, i.e., all points on the curve are subsequently
visited by the trajectory starting at x(0). Thus, when the trajectory on the closed
curve leaves the neighborhood U (shaded area) it will eventually return to this
neighborhood. Obviously, this is independent of the seize of U. Thus, the point
x(0) in Figure 2.4.b (and any other point in the closed curve as well) is an example
of a non-wandering point.

Two types of regular attractors have found particular attention, namely xed-point
attractors and closed orbits. They will briey be described in the following.
1. Fixed Point Attractors. For a long time, economics has concentrated on a special
kind of attractor, namely xed-point (or equilibrium-point)8 attractors. A survey
of some techniques to establish the stability of xed points in linear dynamical
systems is contained in Appendix A.1. In considering nonlinear systems, the local
and global stability properties of a xed point must be distinguished.9
Local Stability of Fixed Points
Let x = (x1 , . . . , xn ) be a xed point of (2.1.1) with x = 0 = f(x ). The following
two local stability concepts are the most relevant local concepts for economics:
The xed point is locally stable (locally Lyapunov stable) if
for every
> 0 there


exists a > 0 such that for all |x(0) x | one has |t x(0) x | t.
The xed point is asymptotically stable if it is stable and if there exists a > 0 such
that for |x(0) x | one has lim |t (x(0) x | = 0.
t

The two stability concepts are illustrated in Figure 2.5. In order to be locally Lyapunov stable a trajectory starting in a neighborhood of the xed point x (determined by and indicated by the light grey-shaded area in Figure 2.5.a) is required
to stay in a neighborhood determined by (dark grey-shaded area). As the
neighborhood can be larger than the neighborhood a trajectory is allowed to
move away from x for a while but must not leave the neighborhood. The localasymptotic-stability concept is depicted in Figure 2.5.b. A trajectory starting in a
8

The term equilibrium as a description of a xed point of a dynamical system will be

avoided as often as possible in the course of the book. The term is mostly used in its
economic meaning and indicates the congruence of supply and demand in a market
and/or the identity of planned and actual individual actions.

Compare also Hahn (1984), pp. 748ff., and Takayama (1974), p. 356, for a detailed
discussion of various stability concepts.

32

Chapter 2

2.5.a

Lyapunov Stability and Asymptotic Stability

Figure 2.5

2.5.b

neighborhood
of x converges toward the xed point; the Euclidian distance between points t x(0) on a trajectory and the xed point decreases for increasing
values of t.

2.6.a

2.6.b
Linear Invariant Subspaces and Nonlinear Manifolds
Figure 2.6

2.6.c

The local behavior of a nonlinear dynamical system near a xed point can be
investigated by inspecting the behavior of the linear part of the system. This is true
for the following reason. Consider the nonlinear system (2.1.2) and assume that it
can be decomposed into a linear part and a nonlinear part, i.e.,
x = Ax + g(x),

(2.1.3)

where A is an n n matrix of constant coefcients and g(x) is a nonlinear vectorvalued function. It is demonstrated in the appendix that it is possible to determine
invariant eigenspaces for the linear part of (2.1.3), i.e., x = Ax. Assume that the stable
and unstable eigenspaces are described by the linear curves E s and E u , respectively,
in Figure 2.6.a and 2.6.b.
In nonlinear systems, the analogs of the linear invariant subspaces E s and E u will
be called the nonlinear, local (with respect to a xed point x ), invariant manifolds

2.1. Preliminary Concepts

33

W s and W u , respectively. Let U Rn be a neighborhood of a xed point x . Then

the nonlinear manifolds are dened as: 10
W s = {x U | t (x) x as t and t (x) U t 0}
(2.1.4)
W u = {x U | t (x) x as t and t (x) U t 0}.

An important property of these nonlinear local manifolds is depicted in Figure

2.6.a. The manifold W s is tangent to the subspace E s at the xed point x , and
the manifold W u is tangent to the subspace E u at this xed point. Furthermore,
it follows from the Hartman-Grobman theorem 11 that the ow of the nonlinear system
(2.1.2) is equivalent with the ow of the linear system x = Ax in a neighborhood of
a xed point x . The meaning of equivalence will be discussed in greater detail
in Chapter 3. For the moment it sufces to say that two systems are equivalent if the
trajectories of the linear and nonlinear systems have the same orientation and move
into the same direction at analogous initial points. Figures 2.6.b and 2.6.c attempt
to illustrate this equivalence. Invariant subspaces E s and E u are shown in Figure
2.6.b; the local manifolds W s and W u are depicted in 2.6.c. In a neighborhood
U (indicated by the shaded area) the trajectories move into similar directions. It
is impossible that a trajectory in Figure 2.6.c moves into a completely different
direction than the analogous trajectory in Figure 2.6.b.
As it is possible to analyze the local behavior of a nonlinear dynamical system in
the neighborhood of a xed point x with the help of the linear part in (2.1.3), it is
desirable to isolate this linear part. The Taylor expansion of a C m function f : R R
at a point x is dened as
1 df (x )
1 d2 f (x )
f (x) = f (x ) +
(x x ) +
(x x )2
2
1! dx
2! dx
(2.1.5)

3
1 d f (x )
1 dm f (x )

3
m
+
(x x ) + . . . +
(x x ) .
3! dx3
m! dxm
In a linear Taylor expansion only the rst two terms are considered and all remaining
terms are dropped. The linear Taylor expansion of a differential equation system
(2.1.1) (or (2.1.2)) yields
x = f(x ) + J|x=x (x x ),

(2.1.6)

with J|x=x as the Jacobian matrix of partial derivatives evaluated at x . When x is

a xed point, f(x ) is, of course, equal to zero.
10

Cf. Guckenheimer/Holmes (1983), pp. 13f., for details. The negative time direction
has been chosen because otherwise it would not have been possible to express the origin
of a diverging trajectory.

11

Cf. Guckenheimer/Holmes (1983), p. 13, for details.

34

Chapter 2

The properties of the Jacobian matrix, dened as

J|x=x

f1
x1

f1
x2

f2
x1
..
.
fn
x1

f2
x2
..
.
fn
x2

...
...

..

...

f1
xn
f2
xn
..
.
fn
xn

(2.1.7)

and its eigenvalues are analogous to those of the coefcient matrix A in linear
dynamical systems (cf. (A.1.3) in Appendix A.1). For example, if the real parts of
the eigenvalues of (2.1.7) are negative, then the xed point is locally asymptotically
stable.
When one (or more) of the eigenvalues of the Jacobian matrix J, evaluated at
the xed point x , equals zero or has zero real parts (i.e., when one of the linear
invariant subspaces is a center subspace (cf. Appendix A.1.3)) the above mentioned
analogies between the eigenspaces and the local nonlinear manifolds do not hold
anymore. When there are such zero roots it is not possible anymore to analyze
the local behavior of a nonlinear dynamical system by inspecting the behavior of
its linear part. In such cases it is necessary to calculate the center manifold and to
investigate the dynamic behavior restricted to this manifold. An introduction to
center manifold theory is contained in the Appendix A.2.
Global Stability of a Fixed Point
The distinction between the local and global stability of a xed point is a necessity
in studying nonlinear dynamical systems. While local stability in a linear system
also implies global stability, nonlinear dynamical systems can be characterized by
multiple xed points which (in continuous-time systems) are alternatively locally
asymptotically stable and unstable. The concept of global asymptotic stability is
dened in analogy to the local asymptotic stability with the modication that can
be arbitrarily large:



The xed point is globally asymptotically stable if it is stable and limt |t x(0)
x | = 0 for every x(0) in the domain of denition of (2.1.1).
A useful tool in investigating the global stability of a xed point is the concept of a
Lyapunov function.12
Theorem 2.1 (Lyapunov (1949)):
Let x be a xed point of a differential equation system and let V : U R be a differentiable function
dened on some neighborhood U W Rn of x such that:
12

Cf. Hirsch/Smale (1974), pp. 192ff., and Guckenheimer/Holmes (1983), pp. 4f. Extensive treatments of the usage of Lyapunov functions can be found in Hahn (1967)
and Lasalle/Lefschetz (1961).

2.1. Preliminary Concepts

35

(i) V (x ) = 0 and V (x) > 0 if x = x , and

(ii) V (x) 0 in U {x }.
Then x is stable. Moreover, if

(iii) V (x) < 0 in U {x },

then x is asymptotically stable.

Note that the neighborhood U W can be chosen arbitrarily large. Thus, a xed
point is globally asymptotically stable if the conditions (i) - (iii) are fullled for the
entire domain of denition of a system like (2.1.2).
The choice of the appropriate Lyapunov function in economic applications is
not always obvious. Good candidates in different elds are welfare functions, the
national product, or arbitrary constructions which resemble the notion of potentials
in physics.13
2. Cyclical Attractors. The present monograph does not focus on the question of
(global or local) stability of a xed point but on dynamic phenomena other than
the (possibly complicated) convergence to a xed-point attractor. The following
discussion concentrates on attractors in the form of closed orbits. A point x is said
to be in a closed orbit if there exists a t = 0 such that t (x) = x. If a closed orbit is
an attractor it will be called a limit cycle in the following.
Denition 2.4: A closed orbit is called a limit cycle if there is a tubular neighborhood U( ) such that for all x U( ), any ow t (x) approaches the closed orbit.

A Limit Cycle
Figure 2.7
13

Cf. Chapter 7 for the role of potentials in catastrophe theory.

36

Chapter 2

An example of a limit cycle in R2 is depicted in Figure 2.7. Trajectories starting at

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

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

Several complicated attractors will be introduced in Chapter 4 and 5.
In nonlinear dynamical systems more than a single xed point can exist. In fact,
the existence of a multiplicity of xed points can be viewed as the origin of various
kinds of complicated dynamic behavior. It is thus important to know the number
of xed points when a nonlinear dynamical system with potentially complicated
behavior is to be investigated. The Poincare index is a helpful tool for this purpose.14

The Determination of the Poincare Index of a Contour

Figure 2.8

Suppose that a two-dimensional, continuous-time dynamical system generates

a vector eld as in Figure 2.8.15 The xed point in the center of the vector eld
is obviously unstable. The Poincare index of the contour D (i.e., the closed curve
encircling the xed point) is determined in the following way: Mark the points
of intersection of D with the vector eld and note the orientation of each single
vector. Start somewhere on D, e.g., at the intersection point # 1, and move along
D in a counterclockwise manner, i.e., with positive orientation. Obviously, during
the journey on D the orientations of the vectors change. After a full 2 motion,
the vector orientation is again the same as that at the beginning but it may have
changed by 3600 or by 3600 (i.e., in a counterclockwise or clockwise manner)
14

15

Cf. Andronov/Chaikin (1949) and Milnor (1965) for detailed treatments of index
theory. Economically motivated discussions can be found in Dierker (1974) and Varian
(1981).
The higher-dimensional (n 3) analog of index theory is degree theory. Cf. Chow/Hale
(1982) for details.

37

2.1. Preliminary Concepts

during the wandering on the contour. In Figure 2.8 a counterclockwise change in

the orientation of the vector eld can be observed but there exist dynamical systems
with a clockwise change.
When a single, complete, counterclockwise rotation of the vector eld can be observed during the counterclockwise motion along D the Poincare index of the contour is dened to be IP = 1. Each additional rotation of the vector eld increases
the index by 1. The Poincare index is the number of complete counterclockwise rotations of the vector eld during a single counterclockwise motion along D. When a
clockwise rotation can be observed it contributes a value of 1 to the count, i.e., for
a single clockwise rotation during a counterclockwise motion along D the Poincare
index is IP = 1.16

2.9.a: IP = 1

2.9.b: IP = 1

2.9.c: IP = 1

2.9.d: IP = 1

Poincare Indices of Different Dynamical Systems

Figure 2.9
16

When the vector eld rotated by 2k with k as an integer during a single counterclockwise motion along D, the Poincare index is therefore identical with k.

38

Chapter 2

In Figure 2.8 the contour D encloses a xed point. It is, of course, possible to
determine the Poincare index of a contour without a xed point in its interior but
the index is typically calculated for the purpose of investigating the number of xed
points in a specic dynamical system. The Poincare index IP (x ) of a xed point is
obtained by calculating the index of a contour D that encircles a single, isolated
xed point x . Figures 2.9.a 2.9.c illustrate the determination of the indices for
different kinds of xed points. Instead of drawing the entire vector eld it sufces
in most cases to consider a few trajectories and their (tangential) vectors at the
points of intersection of the trajectory and the contour D. The stable node (2.9.a)
and the stable focus (2.9.b) have indices IP = +1, while the saddle point in 2.9.c
has an index IP = 1.17 Figure 2.9.d illustrates the determination of the index of
a closed orbit. Applying the same technique as above uncovers that a closed orbit
has a Poincare index of IP = +1.18
The importance of Poincare indices becomes obvious by the fact that the index
of a contour D is equal to the sum of the indices of the objects encircled by the
curve.19 Figures 2.8 and 2.9.a-c depict the case where the contour D and the encircled xed points have the index IP = +1. Similarly, a contour without xed
points in its interior has index IP = 0. Assume that it is known that a dynamical
system generates a closed orbit. Take the orbit itself as the contour D. As its index
is IP = +1 it follows that the orbit must encircle at least one xed point. When
the index of a known xed point (calculated by drawing a contour in a sufciently
small neighborhood of the point) is, e.g., IP = 1 then it follows that there must
be additional xed points encircled by the closed orbit.20 For example, the saddle
loop in Figure 2.10 has an index of IP = +1 and the index of the saddle xed point
B is IP = 1. Thus, there are additional xed points (points A and C in Figure
2.10 with indices IP (A) = 1 and IP (C ) = 1). However, the argument cannot be
applied in the reverse way: when the sum of the known xed points encircled by a
closed orbit equals +1, one cannot be sure that all xed points are indeed known.
17

The Poincare index of some xed points can also be determined analytically. Let J be
the Jacobian of a dynamical system evaluated at the xed point x . Then the index is
IP (x ) =

+1
1

if det(J) > 0;
if det(J) < 0.

If det(J) = 0, the index has to be calculated by the method described above, cf. Varian
(1981). Compare also the formula provided in Wiggins (1990), p. 35.
18

The reader may verify that this is true independent of the orientation of the motion on
the closed curve.

19

This follows from the Poincare-Hopf theorem; cf. Guillemin/Pollack (1974), pp.
132ff., or Varian (1981), p. 100.

20

When all xed points are hyperbolic (cf. Section 3.1) then the number of xed points
is odd. When this number is 2n + 1, n xed points are saddles and n + 1 are either
sinks or sources.

2.2. The Poincare-Bendixson Theorem

39

2.2. The Poincare-Bendixson

Theorem
In most economic applications, especially when dealing with nonlinear dynamical
systems, it is desirable to establish results on the global behavior of dynamical systems. Unfortunately, the global character of the results must be compensated by
compromising 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.
The Poincare-Bendixson theorem employs the notion of a limit set which has not
been mentioned yet.
Denition 2.5:21 An limit set of a point x W is the set of all
points W with the property that there exists a sequence ti such
that limi ti (x) = . The limit set is dened in the same way but
with a sequence ti .

A Saddle Loop
Figure 2.10

In R2 , three different types of limit sets can be distinguished:22

Fixed point attractors.
Limit Cycles.
Saddle loops, i.e., xed points and the trajectories connecting them.
The rst two types of limit sets have already been discussed. An example of a saddle
loop (or homoclinic orbit) is depicted in Figure 2.10 (it is also possible to have only a
21

22

The letters and constitute an asses bridge: the letters are the rst and last letters of
the Greek alphabet, respectively. The limit set represents the set of points where the
motion starts; the limit set contains all points where the motion ends. Cf. Wiggins
(1990), pp. 41f., for an explanation why the sequence {ti }, i , is considered instead
of t .
Cf. Guckenheimer/Holmes (1983), p. 45.

40

Chapter 2

single loop). The associated dynamical system has two unstable xed points (A and
C) and a saddle as a third xed point (B). The - limit set in this example consists
of the union of the two loops (i.e., the trajectories that leave the saddle and return
to it23 ) and the saddle point. Saddle loops can occur in a variety of constellations
of multiple xed points and can enclose closed orbits.24
The subject of the Poincare-Bendixson theorem is to provide sufcient conditions
for the existence of limit cycles in particular sub-areas of the plane.25

2.2.1. The Existence of Limit Cycles

Consider the two-dimensional differential equation system

x 1 = f (x1 , x2 ),

(2.2.1)

x 2 = g (x1 , x2 ),


and assume that an initial point x(0) = x1 (0), x2 (0) is located in an invariant set
D R2 .

A Limit Cycle in a Compact Set D

Figure 2.11

When the set contains limit sets, basically all three types of limit sets mentioned
above are possible. The Poincare-Bendixson theorem discriminates between these
different types:
23

These specic trajectories are also known as separatrices.

24

Cf. Guckenheimer/Holmes (1983), p. 46.

25

A complete discussion of the theorem can be found in Hirsch/Smale (1974), Chapter

11, to which the interested reader is strongly referred. Further presentations can be
found in Arrowsmith/Place (1982), pp. 109ff., Boyce/DiPrima (1977), Chapter 9,
and Coddington/Levinson (1955), Chapter 16. A concise overview is contained in
Varian (1981).

2.2.1. The Existence of Limit Cycles

41

Theorem 2.2 (Poincare-Bendixson): A non-empty compact limit set

of a C 1 dynamical system in R2 , which contains no xed point, is a closed
orbit.
The proof of the theorem can be outlined by a simple geometrical consideration.
Figure 2.11 depicts an example of an invariant set D in the plane. On the boundary
of D, the vector eld points inwards the set, implying that a trajectory will stay in it
for all t once it has entered the set. The question then arises how a trajectory might
wander when it has entered the set. When the xed point does not belong to the
mentioned limit set, i.e., when it is unstable, trajectories starting in a neighborhood
of the xed point will be repelled from it (cf. Figure 2.11). As trajectories of a
continuous-time dynamical system cannot intersect, the only possible limit sets in
D in the case of unstable xed points are closed orbits and saddle loops. As saddle
loops imply the existence of at least one additional xed point (in the form of a
saddle), this possibility is excluded by Theorem 2.2. It follows that if the xed point
in Figure 2.11 does not belong to the limit set of the points in D then all initial
points in D must converge toward a closed curve for t .
While the xed point has been excluded from the limit set in D, a closed orbit
in R2 always encloses a xed point:26
Theorem 2.3: A closed trajectory of a continuously differentiable dynamical system in R2 must necessarily enclose a xed point with x 1 =
x 2 = 0.
The proof follows immediately from the Poincare index theory outlined in the
previous section.
Summarizing, the following procedure is appropriate in applying the PoincareBendixson theorem to a specic dynamical system in R2 .
Locate a xed point of the dynamical system and examine its stability properties.
If the xed point is unstable, search for an invariant set D enclosing the xed
point. When a closed orbit does not coincide with the boundary of D, the vector
eld described by the function f and g must point into the interior of D.

Actually, the set D must not necessarily have the form of the set described in Figure
2.11, i.e., a simply connected set.27 Assume that D is described by the tubular,
26

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

27

A simply connected set is a set that consists of one piece (or two or more touching
pieces) and which does not contain any holes in it. The rst two sets outlined below are

simply connected sets while the third set is an example of a connected but not simply
connected set, cf. Arrowsmith/Place (1982), p. 111, and Debreu (1959), p. 15.

42

Chapter 2

shaded area in Figure 2.7. The boundary of the invariant set is described by the
outermost and innermost closed ellipses. Theorem 2.2 implies that the tubular area
contains at least one closed orbit. However, when the innermost ellipse is repelling
in both directions, the set of points enclosed by this curve can again be considered
the boundary of another invariant set which might contain additional closed orbits.
This procedure can be continued, and eventually the above mentioned stability/
instability criterion of the xed point again becomes relevant. It follows that the
instability of the enclosed xed point is a prerequisite when a simply connected
area is considered. However, this instability does not exclude that a variety of closed
orbits exist in appropriate tubular invariant sets.
The search for the set D constitutes the essential difculty 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 R2 .
Theorem 2.4 (Bendixson): 28 Assume the functions f and g in (2.2.1)
having continuous rst order derivatives in S. If the sum (f /x1 +
g/x2 ) has the same sign throughout S, then there is no periodic solution of (2.2.1) lying entirely in S.
The Poincare-Bendixson theorem thus provides sufcient conditions for the existence of closed orbits in a set D but it does not say anything about the number of
these orbits. The above consideration shows that it is possible that more than a single closed orbit exist.29 When several cycles exist, it is obviously impossible that all
cycles are attracting, i.e., that they are limit cycles in the sense of Denition 2.4. Provided that the xed point is unstable, the innermost cycle in D is stable. Additional
cycles with increasing amplitude are then alternatively unstable and stable.
The most serious disadvantage of the Poincare-Bendixson theorem is the fact
that it is 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 planar set D can be divided into
an inner and outer region with the above mentioned implications, things get drastically more difcult in the three-dimensional case. Suppose that a closed set D R3
exists with the vector eld pointing inwards this set and that the unique xed point
is unstable. Nevertheless, it is possible that no closed orbits exist because a trajectory can arbitrarily wander in R3 without intersecting itself and without necessarily
approaching a limit set (cf. Figure 2.12).
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.
28

Cf. Andronov/Chaikin (1949), p. 227, and Boyce/DiPrima (1977), p. 446.

29

Cf. Section 2.3 for sufcient conditions for the uniqueness of limit cycles.

2.2.2. The Kaldor Model

43

The Invalidity of the Poincare-Bendixson Theorem in R3

Figure 2.12

2.2.2. The Kaldor Model as a Prototype Model in Nonlinear Economic Dynamics

As early as in 1940 N. Kaldor presented a business-cycle model which is able to

generate endogenous limit cycles, and which in the sequel has served as the prototype model for nonlinear dynamical systems in economics.30 Actually, Kaldors
contribution should be considered in conjunction with the work of Kalecki (1937,
1939), who investigated similar models but concentrated on different aspects of
stability.
The key to Kaldors 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,31 i.e., I = I (Y, K ); IY > 0, IK < 0 and there exists a Y1 such that
IY Y > 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 2.13).
For the sake of simplicity, assume that savings depends linearily on income in
the usual way,32 i.e., 0 < SY < 1, and, additionally, on the capital stock with SK >
30

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.

31

Cf. Gabisch/Lorenz (1989), pp. 122-129, for economic justications of these assumptions.
Kaldor himself assumed a sigmoid shape of S (Y, ). The linearity assumption does not
change the qualitative results presented below.

32

44

Chapter 2

Kaldors Investment Function for Different K -values

Figure 2.13

0.33 Income changes proportionally to the excess demand in the goods market.
Together with a standard capital accumulation equation the Kaldor model can be
written as



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

, > 0,

(2.2.2)

with as the constant depreciation rate and as an adjustment coefcient.

Consider rst the local stability of the xed point of system (2.2.2), i.e., the point

= 0. A linear Taylor expansion of (2.2.2), evaluated at

(Y , K ) for which Y = K

the xed point (Y , K ), yields the Jacobian matrix



J=

(IY SY )

(IK SK )

IY

IK

(2.2.3)

with the determinant

det J = (IY SY )(IK ) IY (IK SK ),

(2.2.4)

and the trace

tr J = (IY SY ) + (IK ).
33

(2.2.5)

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 when IK SK < 0 is assumed.

2.2.2. The Kaldor Model

45

It follows from the consideration of linear continuous-time systems in the Appendix

A.1.1 that the eigenvalues are
1, 2 =

tr J


(tr J)2 4 det J
.
2

(2.2.6)

The determinant must be positive in order to exclude the possibility of a saddle

point. The xed point is then locally 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 (IY SY ) < (IK ). 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 (IY SY ) > 0 at the xed point.34 Figure 2.14
demonstrates the model (2.2.2) for this constellation of the slopes at the stationary
equilibrium.

Multiple Goods-Market Equilibria in the Kaldor Model

Figure 2.14

When the trace is positive, i.e., (IY SY ) + (IK ) > 0, the xed point is
unstable. The rst requirement of the Poincare-Bendixson theorem is therefore
fullled.
Second, it should be examined whether the Bendixson criterion, i.e., Theorem
2.4, is fullled. As the slope IY decreases for Y diverging from the stationary equilibrium, the term (IY SY ) changes its sign twice at appropriate income levels.
Thus, depending on the magnitude of (IK ), 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.
34

In fact, Kaldor intended to express the instability of the stationary equilibrium by this
assumption.

46

Chapter 2

The Phase Portrait of the Kaldor Model

Figure 2.15

The question of whether a compact invariant set D exists such that the vector eld (2.2.2) points inwards that set can be answered by means of a graphical
argument. Figure 2.15 represents the phase portrait of the Kaldor model.
Consider rst the set of points (Y, K ) with the property that the capital stock
does not change, i.e.,
= 0 = I (Y, K ) K.
K

(2.2.7)

Total differentiation yields

dK
IY
> 0.
=
dY |K =0
IK

(2.2.8)

= 0} is an upward sloping curve.

Thus, the locus of all points in the set {(Y, K ) |K
= 0, investment decreases because of (IK ) < 0,
For all K above the curve K
< 0. In the same way, K
is positive for all K below the curve for K
= 0.
hence K
The set of points (Y, K ) with Y = 0 is given by
Y = 0 = I (Y, K ) S (Y, K ).

(2.2.9)

It follows that
dK
SY IY
=

0.
dY |Y =0
IK SK

(2.2.10)

The sign of (2.2.10) depends on the values of SY and IY . The difference SY IY

is positive for low as well as for high levels of income and is negative for normal
levels in the neighborhood of the xed point. It follows that the curve for Y = 0

2.2.3. A Classical Cross-Dual Adjustment Process

47

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 points below (above)
the curve Y = 0.
It is relatively easy to nd a set D with the desired properties in the Kaldor
model.35 The subset D = {(Y, K )| 0 Y Y1 , 0 K K1 }, i.e., the shaded
area in Figure 2.15, is compact, and the vector eld obviously points inwards the set
on the boundary. Thus, the requirements of the Poincare-Bendixson theorem are
fullled and it has been shown that the Kaldor model exhibits limit cycles.

2.2.3. A Classical Cross-Dual Adjustment Process

One of the most intensively investigated and best-understood examples in economic

dynamics is the so-called tatonnement process originally introduced (in passing, actually) by L. Walras (1954). In a pure exchange economy with price-taking individuals economic intuition suggests that the price of a good i changes when the excess
demand for this good differs from zero, and the problem arises how to illustrate
the convergence toward a simultaneous equilibrium with zero excess demand for
all goods.36 For the purpose of a didactical illustration, Walras introduced the
concept of the auctioneer who subsequently visits all markets in the economy and
who is the only person being able to change prices. After gradually adjusting prices
in a single market according to the observed demand and supply quantities in the
face of announced hypothetical prices, the auctioneer moves to the next market
where individuals take the eventually found equilibrium price in the previous market into account. In this second market, the equilibrium price is found in the same
fashion, and the auctioneer moves to the next market, etc. It is worthwhile stressing
that this process does not represent a simultaneous price adjustment in all markets
and that it is only a heuristic and didactical description of such a process.
The mathematical treatments of the Walrasian tatonnement that have been
published since the late 1930s departed from this heuristic character of Walrass
original process and have assumed a simultaneous adjustment in all prices.37 Consider a pure exchange economy with n different goods and m price-taking, utilitymaximizing individuals. The price of a single good i is denoted by pi , i = 1, . . . , n.
The aggregate excess demand for good i is zi and depends on the vector p =
(p1 , p2 , . . . , pn ) Rn+ of the prices of all goods. When the change in price
pi is a


function fi : Rn R of the excess demand zi for this good, i.e., p i = fi zi (p) , the
35

In other examples the search for this set D can be difcult. Cf. Gabisch/Lorenz
(1989), pp. 143ff., for a discussion of a non-Walrasian business-cycle model by Benassy
(1984) with a complicated compact set D.

36

The question of whether the price of a single good converges to its partial equilibrium
value never seemed to be a problem for Walras. Cf. Newman (1965) and Walker (1987)
for these interpretations of Walrass work.

37

The list of original mathematical treatments of the tatonnement process include Arrow
(1959), Arrow/Hurwitz (1958), Samuelson (1947), and Uzawa (1961). A survey of
the most relevant results of the tatonnement literature can be found in Hahn (1984).

48

Chapter 2

simultaneous change in all prices is described by the system of differential equations

p 1 = f1 (z1 ) = h1 (p),
p 2 = f2 (z2 ) = h2 (p),
..
.
p n = fn (zn ) = hn (p).

(2.2.11)

A lot of attention has been paid to the question of the local and global stability
of the xed point p of (2.2.11) with the property p i = 0 i = 1, . . . , n, and several sufcient conditions at least for the local stability of the xed point have been
provided. Though extensive treatments of the subject exist in the literature, the
sufcient conditions like gross substitutability between all goods appear to be arbitrary and the problem seems to be far away from being nally solved. However, of
particular importance is the answer to the question of whether the process (2.2.11)
applies to economies with production as well.38
It might be argued that the excess demands zi (p) in (2.2.11) should simply be
replaced by the differences xi yi , i = 1, . . . , n, where xi represents the aggregate
demand of households for good i and yi is the aggregate supply of price-taking
rms. This argument implies that the demand of households and the supply of rms
are always represented by points on the aggregate demand and supply functions,
respectively. Such an assumption appears to be natural but it reects the idea that
the agents can adjust to internal disequilibria innitely fast. Assume on the contrary
that rms, for example, need time to adjust their production plan when (at a given
production level) prices change so that the prot maximizing output changes as
well. When a single market is considered, aggregate output is assumed to change
according to the function k : R R, i.e., y = k (y d y ), k  > 0, with y d (p) as the
desired output (the supply function) at a price p, and y as the actual output. With
this discrepancy between actual and desired output the price adjustment has to be
assumed to depend on the actual excess demand, i.e., p = f (x y ). A partial view
of a single market thus leads to the two-dimensional differential equation system39



p = f x(p) y ,



y = k y d (p) y .

(2.2.12)

The equation system (2.2.12) is a so-called cross-dual adjustment process, and it is

occasionally claimed that this process is suited to reect Marshallian and Walrasian
38

Extensive discussions of adjustment processes in economies with production can be

found in, e.g., Amano (1968), Davies (1963), Marschak (1941), and Takayama (1974).

39

Usually, a slightly different formulation of this process is investigated. Beckmann/

Ryder (1969) and Mas-Colell (1986) incorporate the Marshallian and Walrasian terd
minology of the selling or offer price

which is the inverse of y (p). The output adjustment
p c(y ) , where c(y ) is the marginal cost associated
equation then turns into y = k
with the production of y .

2.2.3. A Classical Cross-Dual Adjustment Process

49

ideas on the price and quantity adjustment in an economy with production.40 However, Marshall and Walras emphasized the entry and exit of rms in a market
and it is obvious that this effect cannot be satisfactorily modeled without further
assumptions. Therefore, the system (2.2.12) will be interpreted in the sequel just as
an example of sluggish adjustment on the supply side of the market with a constant
number of rms.41
Consider the following algebraic specication of (2.2.12) with constant adjustment coefcients > 0 and > 0 in the price and quantity adjustment equations:



p = x(p) y ,
(2.2.13)



y = y d (p) y .
Assume that the system possesses a unique xed point (p , y ). The Jacobian matrix
of (2.2.13) is


xp (p )
J|(p ,y ) =
,
(2.2.14)
ypd (p )



with det J = ypd (p ) xp (p ) and tr J = xp (p ) . As saddle points should
be excluded, assume that the determinant of J is positive. Obviously, this is always
the case when ypd (p ) > xp (p ), i.e., when the supply function is steeper than the
demand function.
When the demand function can be derived from the utility maximization procedure of a Representative Consumer, the slope of the demand function x(p) is
always negative. It follows that the trace tr J is negative for all p. Thus, the xed
point (p , y ) is locally asymptotically stable in this case.
A negative slope of the demand function seems to be intuitively plausible and
the microeconomic textbook literature usually deals with non-negative slopes only
in conjunction with negative income effects. However, recent work in general equilibrium analysis has made evident that the aggregation procedure can lead to a
variety of different shapes of the aggregate demand function. Even if all individual
agents encounter the usual convexities and if their demand functions are negatively sloped, it cannot be excluded without further assumptions that the aggregate
demand function is positively sloped in a certain region of the (p , y ) plane.42
The dynamic effects of the presence of a demand function with a positive slope
at the xed point of the simple cross-dual system (2.2.13) were investigated by Mas40
41

42

Cf. Goodwin (1953, 1970) and Morishima (1959). Discussions of stabilizing processes
of this kind can be found in Flaschel (1991, 1992) and Flaschel/Semmler (1987).
Cf. Novshek/Sonnenschein (1986, 1987) for more appropriate models with a varying
number of rms. A discussion of those models with an emphasis on possibly complex
behavior is contained in Lorenz (1992a).
The precise result is essentially due to Debreu (1974) and Sonnenschein (1972). Compare also the work of Dierker (1974), Hildenbrand/Kirman (1988), Kirman (1989),
and Shafer/Sonnenschein (1982). Saari (1991) discusses the implications of this result for the possible emergence of complicated dynamics.

50

Chapter 2

The Mas-Colell Scenario of a Cross-Dual Process

Figure 2.16

Colell (1986) who assumed an S-shaped demand function as in Figure 2.16.43 In

this scenario the xed point becomes unstable when the trace tr J is positive at the
xed point, i.e., when xp (p ) > /. It should be noted that the xed point can
therefore always become unstable when the slope xp (p ) is positive and when the
adjustment coefcients and take on appropriate values.
The subset D R2 , on whose boundary the vector eld points inwards the set,
cannot be found in the same easy way as in the Kaldor model. Dene this invariant
set as D = {(y, p)| 0 y y2 , 0 p p2 }, i.e., the shaded area in Figure 2.16. The
directions of change of y and p can immediately be determined. As the changes in y
and p depend on the quantities x(p) y and y d (p) y , consider the phase diagram
in the horizontal direction: p is positive (negative) to the left (right) of the demand
function; y is positive (negative) to the left (right) of the supply function. With
two exceptions, the vector eld points inwards the set D on its boundary. The two
exceptional regions on the boundary are the intervals [0, p1 ) and (y1 , y2 ]. Formally,
either y or p can become negative in these intervals on the boundary. In order to
exclude these technical difculties assume that44
lim p = 0 if y (y1 , y2 ]

p0

and

lim y = 0

y0

if p [0, p1 ).

Under these two assumptions the vector eld never points out of the set D and
eventually points toward the interior of the set. As the xed point (p , y ) is unstable, the Poincare-Bendixson theorem implies the existence of at least one closed
orbit in D.
43

Beckmann/Ryder (1969) assumed an S-shaped marginal cost function in order to obtain qualitatively similar results.

44

Of course, there exist other assumptions that ensure the boundedness of the set D
with the desired properties. For example, the critical region (y1 , y2 ] disappears if the
demand function converges asymptotically to the y axis.

2.3.1. The Lienard Equation

51

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 nal motion of a system with a specic 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.

Multiple Limit Cycles

Figure 2.17

Unfortunately, this question of how many cycles exist cannot be answered for
all dynamical systems. Although the theory of two-dimensional dynamical systems
is fairly well-developed, the problem of the uniqueness of limit cycles has not been
nally solved and research is still going on.45 One of the few nonlinear systems
for which it is indeed possible to establish sufcient conditions for the existence of
unique cycles is the so-called generalized Lienard equation.

2.3.1. The Lienard

Equation and Related Tools

This section introduces two theorems on the uniqueness of limit cycles which appear to be particularly useful for economic dynamics. A thorough discussion of
several other theorems with a varying degree of generality can be found in YanQian (1986).
45

It might be considered interesting that the number of limit cycles in two-dimensional

dynamical systems with polynomial expressions of various degree was part of Hilberts
16th unsolved mathematical problem. Cf. Hilbert (1990), p. 317.

52

Chapter 2

Consider the two-dimensional differential equation system46

x = y F (x),
y = g (x),

(2.3.1)

or, written as a second-order differential equation,

x
+ f (x)x + g (x) = 0,

(2.3.2)

with f (x) = dF (x)/(dx). This so-called generalized Lienard equation was originally
formulated to model the dynamics of a spring mass system with g (x) as the spring
force and f (x)x as a dampening factor. Setting g (x) = x and F (x) = (x3 /3 x)
in (2.3.2) yields the so-called van-der-Pol equation
+ (x2 1)x + x = 0,
x

(2.3.3)

which can be considered a prototype equation in two-dimensional nonlinear systems theory. Levinson/Smith (1942) proved the following theorem for the equation (2.3.2).
Theorem 2.5 (Levinson/Smith):47 Equation (2.3.2) has a unique
periodic solution if the following conditions are satised.
a) f and g are C 1 .
b) x1 > 0 and x2 > 0 such that for x1 < x < x2 : f (x) < 0, and > 0
otherwise.
c) xg (x) > 0 x =
 0


d) 0 f (x)dx = 0 g (x)dx =
x
e) G(x1 ) = G(x2 ) where G(x) = 0 g ( )d .
Condition e) is fullled if f (x) is even and g (x) is odd.48
The theorem allows to establish the uniqueness of limit cycles in a convenient
way. The symmetry assumption e) represents the only more or less severe specication in a two-dimensional system.49
A weaker theorem that does not dwell on this symmetry requirement is due to
Zhifen (1986). The theorem represents a very convenient tool in establishing the
uniqueness of limit cycles though it appears to be extensive at rst glance.
46

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

47

Cf. Levinson/Smith (1942), pp. 397f.

48

A function is even if f (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.

49

For example, it can easily be shown that the van der Pol equation (2.3.3) fullls the
requirements of the Levinson/Smith theorem.

53

2.3.1. The Lienard Equation

Theorem 2.6 (Zhifen (1986)): Consider the system of differential

equations
x = (y ) F (x),
y = g (x).

(2.3.4)

If the following conditions are satised:

1. a) g (x) fullls the Lipschitz condition50 in any nite interval;
 0;
b) xg (x) > 0 x =

c) G() = G() = with G(x) =

x
0

g ( ) d ,

2. a) f (x) = F  (x) C 0 (, );
b) F (0) = 0;
f (x)
is nondecreasing when x increases in (, 0) and (0, );
c)
g (x)
f (x)
= constant when 0 < |x|  1,
d)
g (x)
3. a) (y ) fullls the Lipschitz condition in any nite interval;
 0;
b) y(y ) > 0 y =

c) (y ) is nondecreasing; () = ; () = ;

(y ), at y = 0;
d) (y ) has right and left derivatives, + (y ) and

e) + (y )  (y ) = 0 when f (0) = 0,
then the system (2.3.4) has at most one limit cycle, and (if it exists) is
stable.
Note that this theorem does not exclude the case in which no limit cycle exists at
all. The existence of the limit cycle must be proved separately. For example, this
can be done with the help of the Poincare-Bendixson theorem. However, for the
particular case of dynamical systems of the form (2.3.4), several theorems exist that
represent easier ways to establish limit cycles in these systems.51
50

A function g (x), x D, fullls the Lipschitz condition if there is a positive constant k

(the Lipschitz constant) such that for every x D and x D
|g (x) g (x )| k|x x |.

The Lipschitz condition is fullled when g (x) is continuous and when the derivative
g  (x) exists and is continuous on D. Cf. Brock/Malliaris (1989), pp. 15ff., for details.
51

The best-known of these theorems is due to A. Filippov, cf. Yan-Qian (1986), p. 96. An
economic application of the theorem in the context of the model discussed in Section
2.3.3 below can be found in Galeotti/Gori (1990).

54

Chapter 2

Theorem 2.7:52 When the following conditions hold for (2.3.4):

x
1) xg (x) > 0 when x = 0, and G() = with G(x) = 0 g ( ) d ,
2) xF (x) < 0 when x =
 0 and |x| is sufciently small,
3) there exist constants M > 0 and K > K  such that
F (x) K

when x > M,

and F (x) K 

when x < M,

then system (2.3.4) has stable limit cycles.

Figure 2.18 illustrates the requirements of Theorem 2.7 for the special case f (x) =
x2 a and g (x) = bx. F (x) is then a cubic function with a negative slope at the
origin such that (3) is immediately fullled. Furthermore, xg (x) > 0 x = 0 and
G() = .

The Case of a Cubic F (x) in Theorem 2.7

Figure 2.18

Theorems 2.5 and 2.6 and related theorems that rely on the Lienard equation are
not the only tools for establishing the uniqueness of limit cycles. Averaging methods
allow for quantitative approximations of limit cycles in many cases53 , implying that
the number of cycles and their stability can directly be examined.
The two Theorems 2.5 and 2.6 will be illustrated with two economic examples
in the following two sections.

2.3.2. The Symmetric Case: Unique Cycles in a Modied Phillips Model

The Lienard-van-der-Pol equation has received relatively little attention in economic dynamics probably because of the restrictive symmetry assumption of the
52

Cf. Yan-Qian (1986), p. 92.

53

Cf. Guckenheimer/Holmes (1983), pp. 166ff. Chiarella (1990) discusses several endogenous business-cycle models with the help of averaging methods.

2.3.2. Unique Cycles in a Modied Phillips Model

55

well-known Levinson/Smith theorem or because it is not always possible to reduce

a given dynamical system to a form (2.3.1). A remarkable exception can be found in
Ichimura (1955) with an examination of some traditional mathematical businesscycle models.54
In the following, a simple modication of Phillips (1954) continuous-time,
multiplier-accelerator model will be discussed.55 Consumption, C , depends on
income in the usual way:
C (t) = cY (t),

0 < c 1,

(2.3.5)

with Y as net income. The desired capital stock, K d , depends linearily on income:
K d (t) = vY (t),

v > 0.

(2.3.6)

It is assumed that rms change their capital stocks as soon as the actual stock differs
from the desired one:






= I (t) = K d (t) K (t) = vY (t) K (t) ,
K

> 0,

(2.3.7)

with I as net investment. The coefcient 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:



Y (t) = C (t) + I (t) Y (t) ,

> 0,

(2.3.8)

with the coefcient as an adjustment parameter.

Differentiating (2.3.7) with respect to time,



I (t) = v Y (t) I (t) ,

(2.3.9)

and substituting for I and I in the differentiated form of (2.3.8) yields the linear
second-order differential equation with constant coefcients



Y (t) + (1 c) + v Y (t) + (1 c)Y (t) = 0.

(2.3.10)

Let y = Y Y , with Y as the xed-point value of net income. Equation (2.3.10)

then turns into



y(t) + (1 c) + v y (t) + (1 c)y (t) = 0.
54

Another application can be found in Schinasi (1981).

55

Cf. Lorenz (1987e) for the following model.

(2.3.11)

56

Chapter 2

The solution of such a second-order differential equation with constant coefcients

is discussed in Appendix A.1.1; the eigenvalues of (2.3.11) are

(A1 )2 4 A2
(2.3.12)
1, 2 =
2



with A1 = (1 c) + v and A2 = (1 c). The eigenvalues are complex conjugate when the discriminant is negative. Equation (2.3.10) then exhibits
persistent oscillations when A1 = 0, i.e., when the eigenvalues are purely imaginary.
In order to transform (2.3.11) into a Lienard equation the assumption of constant coefcients has to be abandoned. Formally, a Lienard equation can easily be
obtained. For example, let = h(y ) be a smooth function depending on income
in the way illustrated in Figure 2.19, i.e., investment responds nonlinearily to gaps
between the desired and the actual capital stock. While a strong reaction to these
gaps is assumed for income levels near the xed point y = 0, investment responds
sluggishly if the deviation of income from its xed-point level is large. The investment function (2.3.7) therefore turns into a kind of Kaldorian investment function
with the typical sigmoid shape.
A1

The Investment Coefcient = h(y )

Figure 2.19

With = h(y ), equation (2.3.11) becomes


y + (1 c) + h(y ) h(y )v y + h(y )(1 c)y = 0.

(2.3.13)


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

f and g are C 1 ,
= h(y ), h(y ) > 0 y,
h(y ) = h(y ),
v > 1,

h (0) = 0,

h (0) < 0,

57

2.3.3. Unique Cycles in a Kaldor Model

h(0) >

(1 c)
1 v ,

equation (2.3.13) is indeed a Lienard equation which fullls the assumptions of the
Levinson/Smith theorem:
a) Assumed


b) There exist y1 < 0 and y2 > 0 such that f = (1 c) + h(y ) h(y )v < 0 for
y1 < y < y2 and f > 0 otherwise.

c) As g (y ) = h(y )(1 c)y > (<) 0 for y > (<) 0, it follows that g (y )y > 0 y .
y
d) lim F (y ) = because f (y ) increases for y > y2 , and lim G(y ) = 0 g ( )d =
y

because h(y ) > 0 y .

e) f (y ) = f (y ) by assumption, and g (y ) = g (y ) because h(y )(1c)y > (<)0

for y > (<) 0.
Though equation (2.3.13) is therefore formally identical with a Lienard equation
and fullls the requirements of the Levinson/Smith theorem, it must be stressed
that the postulated function = h(y ) is purely ad hoc. While the general assumption that h(y ) is bell-shaped can already be criticized, it is further necessary to
assume the above relations between h(y ) and the remaining coefcients in order
to obtain the desired result. The usual advantage of nonlinear cycle models over
linear models like the original Phillips model, namely that these models do not rely
on precise parameter constellations in order to generate persistent uctuations,
therefore vanishes when the Levinson/Smith theorem is applied to this particular
example.
The following application of Theorem 2.6 demonstrates that the uniqueness of
limit cycles can be established in some cases without the introduction of additional
and restrictive assumptions.

2.3.3. The Asymmetric Case: Unique Cycles in a Kaldor Model

Consider once again the familiar Kaldor model that serves as a prototype model
in the course of this book. The general formulation of the model in its net value
version is:



Y = I (Y, K ) S (Y, K ) ,
= I (Y, K ).
K

(2.3.14)

It is not possible to write this standard model immediately as a Lienard equation

because the two-dimensional system obtained by differentiating the rst or second
, respectively,
equation of (2.3.14) with respect to time and substituting for Y or K
will not be independent of the second variable: in either case partial derivatives will
remain that depend on the second variable.

58

Chapter 2

However, there are several ways to transform (2.3.14) into a Lienard equation
by suitable assumptions on the functions I (, ) and S ().56 The following modication is studied in Galeotti/Gori (1990).57 Assume that savings does not depend
anymore on the capital stock, i.e., S = S (Y ), and that IK < 0 is constant. The
Kaldor model (2.3.14), centered at the xed-point values Y and K , then turns
into



y = i(y, k ) s(y ) ,
(2.3.15)
k = i(y, k ),
with y = Y Y and k = K K . The reader may verify that (2.3.15) still cannot be
directly transformed into a Lienard equation with the help of the method described
above. However, the variable transformation
u = y,
v=k

y
,

(2.3.16)

transforms (2.3.15) into




u
u = i(u, v + ) s(u) ,

u
u
v = i(u, v + ) = s(u).

(2.3.17)

Combining the two equations yields



iz
= iu u + u + iz v su u ,
u

(2.3.18)
iz
= (iu + su )u + iz s(u),




with iz as the partial derivative of i u, v + (u/) with respect to the second argument.
When iz is constant, (2.3.18) is obviously a Lienard equation. In order to apply
Theorem 2.6 to this system, it is desirable to write (2.3.18) in a two-dimensional
form comparable to the form (2.3.4) in Theorem 2.6. Write iz/ = a. The sou
called Lienard transformation introduces a new variable w = u 0 (i + a s ) d
56

A couple of modications of (2.3.14) are described in Lorenz (1987e). Galeotti/Gori

(1990) demonstrate that many of these modications can be reduced to a common form
by appropriate transformations.

57

The authors use a slightly different version of Zhifens theorem which can be shown to
be identical with Theorem 2.6 presented above. Galeotti/Gori prove the existence
of a limit cycle with the Filippov theorem.

2.3.3. Unique Cycles in a Kaldor Model

59

such that (2.3.18) is transformed into the system of rst-order equations



u = w +

(i + a s ) d,

(2.3.19)

w = u
(iu + a su )u = iz s(u).

In (2.3.19), the expressions corresponding to F (x), f (x), (y ) and g (x) of Theorem 2.6 are 58
 u
F (u) =
(i + a s ) d,


f (u) = F = (iu + a su ),
(w) = w,
g (u) = iz s(u).

(2.3.20)

In order to apply Theorem 2.6 to the system (2.3.19), the functions i(u, z ) and s(u)
have not been specied precisely enough yet. Assume that s(u) and i(u, ) display
the sigmoid shapes known from the original Kaldor model with limu su =
and limu iu = 0.59
In addition to the sigmoid shapes of i(u, z ) and s(u) it will be assumed that the
lower partial equilibrium point u1 is closer to zero than u2 . Figure 2.20 depicts
this scenario on the goods market. Furthermore, the functions f (u) and g (u) are
assumed to intersect twice, such that for the assumed limits of su and iu , the ratio
f (u)/g (u) is increasing for all values of u = 0 (cf. Figure 2.21 for the shapes of
f (u), g (u), and the ratio f (u)/g (u)).
With this geometric specication of the function f (u) and g (u) and the assumption iz < 0 and constant, Theorem 2.6 can be applied to (2.3.19):
1. a) Assumed; g (u) is C ;
b) uiz s(u) > 0 u =
 0;





iz s( ) d = =
c) G() =
0


iz s( ) d = G(),

2. a) Assumed;



b) F (0) = i(0, 0) s(0) = 0;
58

Of course, these expressions can also be determined by direct inspection of (2.3.18)

and comparing it with x
= y g (x) f (x)x derived form (2.3.4).

59

Cf. Kaldor (1940) for a justication of the shape of s(u). While the nonlinearity in
Kaldors investment function does not represent a really controversial assumption, an
ever-increasing savings rate off the equilibrium point does not seem to be very convincing. Nonetheless, Kaldors original shape of s(u) will be assumed in the following
because a linear function s(u) does not fulll the requirements of Theorem 2.6. The
reader may verify that a linear s(u) or a savings rate converging to a nite value imply
an eventually declining ratio f (u)/g (u).

60

Chapter 2

An Asymmetric Kaldor Scenario

Figure 2.20

The Functions f (u), g (u), and the Ratio f (u)/g (u)

Figure 2.21

c) Cf. Figure 2.21;

d)

3. a) Obvious, since (w) = w ;

b) (w)w = w2 > 0 w =
 0;
c) d/dw = 1;
d) Obvious, since (w) = w and  (w) = 1;
e)   = 1 = 0.
All requirements of Theorem 2.6 are fullled and possible limit cycles of (2.3.19)
are unique and stable. The existence of this limit cycle can easily be demonstrated
with the help of Theorem 2.7: as the theorem concentrates on the function F (u),
the existence of a limit cycle follows immediately from the assumed form of f (u) and
hence F (u) in Figure 2.21. All other requirements are covered by the properties
mentioned above.

2.4.1. The Dynamics of Conservative Dynamical Systems

61

2.4. Predator-Prey Models

The dynamic models presented thus far are able to exhibit limit cycles. If a system
has a single limit cycle, then the trajectories starting at 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 dynamic behavior.

2.4.1. The Dynamics of Conservative Dynamical Systems

Consider the two-dimensional dynamical system

x = f1 (x, y ),

(2.4.1)

y = f2 (x, y ),

with the Jacobian matrix

J=

f1
x

f1
y

f2
x

f2
y

(2.4.2)

Assume that the determinant of the matrix J is positive for all (x, y ). It is shown in
the Appendix A.1.1 and in the models presented thus far that the sign of the trace
of the Jacobian then plays a dominant role in determining the kind of oscillating
behavior of a two-dimensional 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.60 The
following heuristic reection may be helpful in understanding dynamical systems
which exhibit closed orbits.
Consider a dynamic model like the Kaldor model to which the Poincare-Bendixson theorem can be applied. The xed point 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 xed point in all directions, which may be interpreted as a negative friction. If
this were the case for every point in the phase space, the ow of the system would
spiral toward the outer bounds of the phase space and no closed orbit could exist.
However, it is demonstrated in the Bendixson criterion, i.e., Theorem 2.4, that 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 dampened for points sufciently far away from the equilibrium.
60

Cf., e.g., the original Lienard equation in Section 2.3., where f  (x)x represents a dampening term.

62

Chapter 2

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.61 Most
economic models discussed in this book belong to this class of dynamical systems.
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 exists. According to the preceding heuristic reection on the
qualitative meaning of the trace of a Jacobian, this absence of friction is equivalent
to a zero trace for all points in the phase space.62 The zero trace implies that the
(possibly multiple) xed points can be only saddles or centers.
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 attempt to understand biological and ecological phenomena by means of
mathematical analysis. The model is concerned with the dynamic relations between
two interdependent species acting as predator and prey, respectively, within an
ecosystem.63 The dynamical system consists of the two-dimensional differential
equation system
x = ax bxy,
y = cy + dxy,

a, b, c, d > 0,

(2.4.3)

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
population decreases exponentially at the rate c. If y = 0, the prey population
grows exponentially to innity at the rate a.
System (2.4.3) has two xed points with x = y = 0, namely (x , y ) = (c/d, a/b)
and the trivial xed point (0, 0) (a saddle point). The Jacobian matrix of (2.4.3),
evaluated at the non-trivial xed point, is


J=

a by

bx

dy

c + dx

bc/d

da/b

(2.4.4)

and has det J = ac > 0 and tr J = 0, i.e., the eigenvalues are purely imaginary. The
xed point is therefore neutrally stable, implying that no conclusion on the dynamic
behavior of (2.4.3) can be drawn from the inspection of the Jacobian (2.4.4).
61

The term stems from considerations of physical systems with a permanent input of energy which dissipates through the system. If the energy input is interrupted, the system
collapses to its equilibrium state.

62

The obvious physical example of a conservative dynamical system is the perfect pendulum where no friction is involved. Note that the harmonic oscillator, shortly mentioned
in Appendix A.1.1, is an example of a conservative system.

63

Cf. Clark (1976) for a survey of economic approaches to biological phenomena.

2.4.1. The Dynamics of Conservative Dynamical Systems

63

In order to study the global dynamic behavior of a system like (2.4.3), it is useful
to introduce the concept of the rst integral:64
Denition 2.6: A continuously differentiable function F : R2 R is
said to be a rst integral of a system x = f(x), x R2 , if F is constant for
any solution x(t) of the system.
When such a rst integral exists it is not unique, i.e., when F (x) is a rst integral
then F (x) + C is a rst integral as well.

Level Curves in a System with a First Integral (The Dashed Line is Impossible)
Figure 2.22

The constancy of F (x) for any solution can be expressed as dF (x)/dt = 0. The
constant expressions F (x) + C dene level curves for different values of the constant
C . When a saddle is the only xed point, the level curves are given by the unstable
and stable manifolds and the associated hyperbolic trajectories. When a unique
xed point is a center the level curves are closed orbits. Any initial point (except
the xed points) is then located in a closed orbit. This can be visualized by an
inspection of Figure 2.22.65 The closed curves L1 , L2 , and L3 represent examples
of level curves for different values of C . Each level curve is characterized by the
property that dF (x)/dt = 0. Consider a point x(0) located in the level curve L2 .
The trajectory passing through this point is t (x(0)) (for t > 0 and
 0). As x(0)

t<
is a point in a level curve, it can be described by the constant F x(0) . The point
t (x(0)), t > 0, must also be located in this level curve because otherwise

the term
F (x) would not be constant for any solution. It follows that F (x(0)) = F t (x(0))
t > 0 and t < 0. The trajectory indicated by the dashed line in Figure 2.22 thus
cannot exist when the system has a rst integral. All initial points are located in one
of the innitely many level curves characterized by different values of C .
64

Cf. Andronov/Chaikin (1949), pp. 99ff., and Arrowsmith/Place (1982), pp. 101ff.
and 144ff., for the following ideas. The term is a relic of early inquiries into the behavior
of differential equations, cf. Arnold (1973, p. 75.

65

Cf. Arrowsmith/Place (1982), p. 101, for this argument.

64

Chapter 2

In order to examine whether (2.4.3) possesses a rst integral66 , eliminate time

from the system by dividing both equations, i.e.,
dy
(c dx)y
=
.
dx
(a by )x

(2.4.5)

Rearranging, dividing by xy , and integrating yields

a ln y + by c ln x + dx = A,

(2.4.6)

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

y a eby xc edx = B.

(2.4.7)

Set y a eby xc edx = F (x, y ). The function F (x, y ) is a rst integral of (2.4.3), which
can be seen from differentiating it with respect to time:
d
F (x, y )
F (x, y )
F (x, y ) =
x +
y.

dt
x
y

(2.4.8)

The partial derivatives of F are

c

F (x, y )
= F (x, y ) + d ,
x
x

(2.4.9)

a

F (x, y )
= F (x, y ) + b ,
y
y

(2.4.10)

and

respectively, such that

c

a






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

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

The following theorem summarizes the discussion of the dynamic behavior of
the system (2.4.3):
Theorem 2.8 (Hirsch/Smale):67 Every trajectory of the Lotka/Volterra equations (2.4.3) is a closed orbit (except the xed point (y , x )
and the coordinate axes).
66

Cf. Gandolfo (1983), pp. 450ff.

67

Cf. Hirsch/Smale (1974), p. 262.

2.4.1. The Dynamics of Conservative Dynamical Systems

65

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 innitely many closed orbits describes the actual dynamic behavior of
the system (cf. Figure 2.23).

Stylized Closed Orbits in a Predator-Prey System

Figure 2.23

The predator-prey system (2.4.3) was classied as a conservative system with the
help of the rst integral. An alternative denition 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 innitely many closed orbits and that
every initial point is located in such a closed orbit. Consider the area A in Figure
2.24. Initial points contained in this subset of the plane move to the area B under
the action of the ow. 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 3)). A dynamical system can be called conservative if it is area preserving.
In contrast, dissipative systems contract areas (or volumes) when trajectories approach an attractor. Figure 2.25 shows two trajectories starting at different initial
points and approaching a xed point attractor. The area between the two trajectories is continuously getting smaller and approaches zero when the trajectories are
close to the xed point.
Formally, the property of area preservation of a system x = f(x), x Rn , can be
examined with the help of the Lie derivative or the divergence of the vector eld dened
as
 fi
V
= div f =
,
V
x
i
i

i = 1, . . . , n,

with V as the volume (i.e., the n-dimensional analog of an area) and div f as the
divergence of f. The Lie derivative is negative when the system is dissipative, i.e., if
it contracts area, and it vanishes when the system is conservative.

66

Chapter 2

Area Preservation in a Conservative System

Figure 2.24

Area Contraction in a Dissipative System

Figure 2.25

In most examples from classical mechanics the two alternative denitions of

conservative and dissipative systems, i.e., via the existence of a rst integral or the
area preservation property, lead to identical classications.68 The predator-prey
system (2.4.3) is a peculiar system because it has a rst integral but the Lie derivative
differs from zero:
V
= a by c + dx =
 0
V
68

Cf. Arnold (1973), pp. 198f., and Arrowsmith/Place (1982), pp. 103f., for identical
results in Hamiltonian systems.

2.4.2. The Goodwin Model

67

for all (x, y ) except the xed point. When x and y 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 the closed orbits in
Figure 2.23: 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. Goodwins Predator-Prey Model of the Class Struggle

Conservative dynamical systems are really rare in economics. A remarkable exception is Goodwins 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, denitions, and relations describes the framework of the economy.
For convenience, the goods price is normalized to unity.
Output:
Labor:
Capital:
Wage rate:
Goods price:
Labor productivity:
Labor income:
Labor income share:
Capital income:
Prot share:
Savings:
Capital output ratio:
Labor supply:
Employment rate:

Y
L
K
w
p=1
Y /L = a = a0 et , = constant
wL
u = wL/Y = w/a
Y wL
1 w/a
(1 w/a)Y
K/Y = , = constant
N = N0 ent , n = constant
v = L/N

, equals savings, the growth rate of the capital stock, K/K

If investment, I = K
, is

given as K/K = (1 w/a)Y /K = (1 w/a)/ . 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 ,
= (1 w/a)/ .

(2.4.12)

68

Chapter 2

The above presentation can be summarized in the following set of growth rates
involved in the model:
N
a
= n,
= ,
N
a

K
w Y
w
= (1 ) = (1 )/,
K
a K
a

Y
K
,
=
Y
K
L
Y
w
= (1 )/ =
.
L
a
Y

The central variables in the Goodwin model are the employment rate, v , and the labor bill share, u. Consider rst the evolution of the employment rate v : logarithmic
differentiation and substitution yields

= L/L
v/v
N /N,
= Y /Y n,
(2.4.13)

= (1 w/a)/ ( + n),
1u
=
( + n),

or
v =

1 u

( + 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
= w/w
u/u

a/a
= w/w

(2.4.15)

Goodwin assumed that the wage rate changes according to a standard Phillips curve,
i.e.,

w/w
= f (v ),

lim f (v ) = ,

v1

lim f (v ) = < 0,

v0

f
> 0.
v

(2.4.16)

For simplicity, (2.4.16) is linearily approximated by w/w

= + v , yielding
u/u
= + v ,

(2.4.17)


u = + v u.

(2.4.18)

or

Equations (2.4.14) and (2.4.18) have the same formal structure as the Lotka/
Volterra equations (2.4.3):



v = 1/ ( + n) u/ v,



(2.4.19)
u = ( + ) + v u.

69

2.4.3. Predator-Prey Structures in Dissipative Systems

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.
System (2.4.19) has two xed points, namely the trivial xed point at the origin
and
+
,

u = 1 ( + n).
v =

(2.4.20)

The Jacobian, evaluated at the non-trivial xed point, is



J=

0



1 ( + n)

( + )

(2.4.21)

As the equations (2.4.19) and the Jacobian (2.4.21) are formally identical with the
Lotka-Volterra equations (2.4.3) and the associated Jacobian (2.4.4), every initial
point in the Goodwin model is located in a closed orbit.69
This result supports the idea that a capitalist economy is permanently oscillating. While the dynamic 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 interdependence and the class struggle, constitutes
the main reason why the Goodwin model found attention especially among political economists.70 However, the analogy is supercial 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 criticized 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 might not necessarily reect
relevant inuences. It may therefore be useful to investigate whether the Goodwin
model is robust when facing modications.

2.4.3. Other Examples and Predator-Prey Structures in Dissipative Systems

The Goodwin model constitutes the most prominent economic example of a predator-prey structure. Other examples do exist but usually very specic functional
69

Goodwin (1967) investigated the solution to (2.4.10) by means of graphical integration. Cf. Gabisch/Lorenz (1989), pp. 153ff., and Gandolfo (1983), pp. 448ff., for a
presentation of Goodwins method.

70

Further developments of Goodwins model can be found in a variety of papers, including

Desai (1973), Flaschel (1984), Glombowski/Kruger

(1987), Ploeg (1983, 1985),

Pohjola (1981), Velupillai (1979), and Wolfstetter (1982).

70

Chapter 2

forms are assumed. An example of a predator-prey model with a fairly general

set of assumptions is contained in v. Tunzelmann (1986) who re-considered the
Malthusian population dynamics. The population growth rate increases with an
increasing real wage rate, w, and decreases when the real wage rate is zero, i.e.,
P /P = c + w,

c, > 0.

(2.4.22)

The growth rate of the real wage rate decreases when the population increases, i.e.,

w/w
= a P,

a, > 0.

(2.4.23)

The equation reects the basic Malthusian assumption that food supplies cannot
grow as fast as the population. An increasing population thus decreases per-capita
food supply which can be considered the real wage rate (in this simple scenario
with workers paid in the form of food). Multiplying the equations by P and w,
respectively, yields the standard predator-prey form (2.4.3.).
The Lotka/Volterra system (2.4.3) and its economic equivalents (2.4.9) and
(2.4.22) (2.4.23) are dynamical systems whose behavior is very sensitive to variations in their functional structure. Dynamical systems which change the character
of their dynamic behavior under small perturbations are called structurally unstable
systems.71 In order to demonstrate the effect of small perturbations, a basically
arbitrary modication of the original Goodwin model will be performed in the
following.72 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 inuenced by the labor bill share, u:

w/w
= f (v ) + g (u),

(2.4.24)

and assume that g (u) > 0 u and 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 consideration of this modied Phillips curve in the Goodwin model leads
to



v = 1/ ( + n) u/ v,



(2.4.25)
u = ( + ) + v + g (u) u.
71

Compare the discussion in Section 3.1 for precise denitions of various notions of structural stability.

72

Economically more reasonable modications can be found, e.g., in Wolfstetter (1982)

in an investigation of the inuence of stabilization policies in the Goodwin model and
in an elaborate discussion of Wolfstetters results in Flaschel (1987). However, the
effects of these modications are not as easily to trace as the simple perturbation given
here.

2.4.3. Predator-Prey Structures in Dissipative Systems

71

The new non-trivial xed point is

v
u




+ g 1 ( + n)
+ g (u)
,
=
=

= 1 ( + n).

(2.4.26)

The Jacobian, evaluated at this xed point, is

J=

0


1 ( + n)

g (u ) ( + )


g  (u ) 1 ( + n)

(2.4.27)

The determinant of J is not unambiguously positive anymore. Suppose that g (u )

> 0 is sufciently small such that det J is indeed positive. The trace of J will be
different from zero even for a seemingly negligible magnitude of g  (u )u = 0.
As the derivative is assumed to be negative, the trace is negative. The real parts
of the complex conjugate eigenvalues are therefore negative and the xed point is
locally asymptotically stable. System (2.4.25) therefore possesses an attractor and
has turned into a dissipative system.
Cugno/Montrucchio (1982b) investigated a similar modication of the Goodwin model with an extended Phillips curve f (u, v ) and were able to provide global
stability results. Other modications of the original Goodwin model can easily
be constructed. Samuelson (1971, 1972) demonstrated that the consideration of
diminishing returns in a general Lotka-Volterra framework can destroy the conservative character of the system.73
Actually, any additional term that inuences the growth rate of a variable and
which depends on the value of this variable is equivalent to the introduction of
a dampening effect. The conservative dynamics of the original Lotka/Volterra
equations will then be destroyed and the emerging system turns into a dissipative
dynamical system.
The Goodwin model suffers from its inherent structural instability (as is the case
with any conservative dynamical system) and is therefore sensitive to (even numerically small) modications in its structure. As soon as a dissipative structure prevails,
a modied Goodwin model can exhibit converging or diverging oscillations as well
as limit cycles depending on the assumed dampening or forcing terms. While the
original model is structurally unstable, modications thereof nevertheless still allow
for an oscillating behavior of the economically most relevant magnitudes like the
unemployment rate and the labor income share.
It is possible to increase the dimension of the original model by considering
additional state variables (like variable capital-output ratios or variable growth rates
73

Samuelson did not refer specically to the Goodwin model but to the biologically oriented Lotka-Volterra framework. In the Goodwin model, diminishing or increasing returns to scale can be taken into account by assuming that the capital-output ratio
changes with Y .

72

Chapter 2

of the labor supply and labor productivity). It is, however, also possible to increase
the dimension by introducing particular lag structures. As an example, consider
the Phillips curve
w
= + v,
w

(2.4.28)

assumed in the original Goodwin model. In (2.4.28), the growth rate depends
only on the present value of the employment rate. Alternatively, it can be suspected
that past values of the employment rate have an inuence on this growth rate as
well. The most recent values will probably have the strongest inuence on the
growth rate, and the inuence of values realized in the past should cease when the
realization dates are far away from the present date. An example of a lag structure
that represents such a vanishing inuence of past realizations of a variable is given
by a continuously distributed lag (cf. Appendix A.3 for details). In modications of

Goodwins original model, Brody/Farkas

(1987) and Chiarella (1990) assumed
that the growth rate of the real wage rate is determined by
w
= + x,
w

(2.4.29)

where x is dened as

x=

e(t)/T
v ( )d = et/T
T

e/T
v ( )d.
T

(2.4.30)

It is shown in the Appendix A.3 that differentiating an equation like (2.4.30) with
respect to t yields the ordinary differential equation
x =

vx
.
T

(2.4.31)

Together with the previously derived equations (2.4.19), the Goodwin model thus
turns into the three-dimensional system



v = 1/ ( + n) u/ v,



u = ( + ) + x u,
vx
x =
.
T

(2.4.32)

It has been demonstrated by Chiarella (1990a), pp. 73ff., that the system (2.4.32)
generates limit cycles in the variables v and u. The result could be obtained by
investigating the dynamic behavior of the system on its center manifold (cf. Appendix A.2. for details). The conservative character of the original two-dimensional

2.5. Relaxation Oscillations

73

Goodwin model has disappeared through the introduction of an exponential lag

structure and a dissipative system has emerged.74

2.5. Relaxation Oscillations

In the previous sections diverse two-dimensional models have been considered
which allow for oscillations in the two state variables. Like the Kaldor model, many
other dynamical systems include equations of the form
xi = i fi (x1 , x2 , . . . , xn ),

i = 1, . . . , n,

(2.5.1)

with i as adjustment coefcients. In many investigations of n-dimensional, economic

dynamic models involving equations of the form (2.5.1) it has been assumed that
one or several of the adjustment coefcients are very large. The assumption is
usually justied with the observation that well-organized markets (like nancial
markets with extensive information ows) react much faster to disequilibria than
others. The interesting consequence of this assumption consists in the fact that the
effective dimension of the dynamical system can be reduced with this procedure.
For example, if a single i in an n dimensional systems tends toward innity the
dimension of the remaining system can be reduced to n1 when the motion of the
fast variable is bounded. However, when the motion is bounded it is not dened
on Rn1 but on an n1 dimensional manifold in Rn .75
As an example, consider once again the Kaldor model (2.2.2)76 but (for the sake
of simplicity) assume that there is no capital depreciation and that savings depends
only on income:



Y = I (Y, K ) S (Y ) ,
= I (Y, K ).
K

>0

(2.5.2)

74

Brody/Farkas
(1987) estimated the parameter values in the original Goodwin model
and the modied model (2.4.32) for the Hungarian economy. A comparison between
the resulting equilibrium values of employment and wages in both models uncovered
that the modied version is better suited for generating actual, empirical values.

75

Cf. Andronov/Chaikin (1949), Chapter 12, for a detailed discussion of the theory of
relaxation oscillations. Compare also Hairer/Nrsett/Wanner (1982), pp. 107ff., for
a description of relaxation oscillations in the van-der-Pol oscillator.

76

Other dynamical systems than this particular Kaldor model are actually better suited for
illustrating the phenomenon of relaxation oscillation, cf. Chiarella (1990a), pp. 25ff.,
or Guckenheimer/Holmes (1983), pp. 68ff. The Kaldor model is nevertheless being
used because a few standard problems in transforming given systems to a form required
for an application of an established mathematical result will become obvious. Other
economic examples of relaxation oscillations can be found in Chiarella (1990b) and
Franke/Lux (1992).

74

Chapter 2

2.26.a

The Graphs of K = g (Y ) and Y = g 1 (K )

Figure 2.26

2.26.b

With = 1/, the rst equation can be re-written as


1

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

(2.5.3)

Assume that 0.77 It follows that, in the limit, Y except in a neighborhood

of those points which imply F (Y, K ) I (Y, K ) S (Y ) = 0.
The consequence of this innitely fast adjustment of Y on the dynamic behavior
of a system depends on the properties of F (Y, K ). When FY > 0 (Y, K ), the system
explodes. However, in the considered Kaldor model, the derivative is negative for
low and high values of Y and positive for Y values in the neighborhood of the
xed point. It follows that the motion is bounded and that Y rapidly converges to
one of the possibly multiple goods-market equilibrium values of Y depending on
the initial conditions. It follows that F (Y, K ) = 0 for almost all t on the time scale
relevant for the evolution of the slow variable K .
With 0, the Kaldorian model (2.5.2) can thus be written as
F (Y, K ) = I (Y, K ) S (Y ) = 0,
= I (Y, K ).
K

(2.5.4)

Alternatively, (2.5.4) can also be written as

= S (Y ),
K

(2.5.5)

where the goods-market equilibrium condition has already been considered in the
capital-adjustment equation. However, (2.5.5) still mentions the two variables K
and Y , and cannot be called a 1D system. The state variable Y has to be replaced
by an expression depending on K .
77

The parameter is also known as the time constant.

2.5. Relaxation Oscillations

75

With the knowledge derived in Section 2.2.2 it is easy to provide a function

K = g (Y ). The equality I (Y, K ) S (Y ) = 0 has been derived in the present
context under the assumption 0, but the equation has already been studied in
Section 2.2.2. in the context of a description of the curve with the property Y = 0.
Implicitly differentiating F (Y, K ) = 0 yields
dK
SY IY
=

0.
dY
IK

(2.5.6)

The same arguments as those provided in Section 2.2.2 apply for this case. Thus, a
function K = g (Y ) exists for this model with a shape outlined in Figure 2.26.a. The
inverse of K = g (Y ) is shown in Figure 2.26.b. Inserting the relation Y = g 1 (K )
in (2.5.5) yields



= S g 1 (K ) ,
K

(2.5.7)

i.e., a single equation of motion for the state variable K .

It might be suspected that the possible
types of motion of this system are restricted to
those types known from linear 1D systems because oscillatory behavior is known to emerge
only for 2D continuous-time systems. However, due to the motion on a manifold instead of the entire phase space, a different dynamic phenomenon can be observed. In order to get an idea of the possible motion consider the phase space of the remaining equation (2.5.7) in Figure 2.27. The reduced system (2.5.7) has been derived from the original model (2.5.2); thus, it should imply the
The Graph of (2.5.7)
same xed point (stationary equilibrium) as
Figure 2.27
the original Kaldor model. According to the
1
construction of the relation Y = g (K ), the stationary value of K is located in the
middle, upward sloping part of the graph in Figure 2.26.b. At the xed point, one
= 0. Thus, the savings function should have such a form that the graph of
has K
(2.5.7) intersects the K axis with its upward-sloping, middle part.
The system (2.5.7) with the associated graph in Figure 2.27 appears as a regular
one-dimensional system. K increases (decreases) when the initial point on the
graph is located in the positive (negative) orthant. The xed point C is obviously
unstable; this should have been expected in this model because it is just a variant of
the standard Kaldor model. If one chooses an initial point on the graph in a small
neighborhood of the xed point, the motion is repelled from C and converges
toward B or D, respectively. The motion converges toward the points B and D also
when the initial point is located on the upper, downward-sloping part of the graph
or the lower, downward-sloping part of the graph, respectively. However, neither B

76

Chapter 2

The Kaldor Model with a Large Adjustment Coefcient

Figure 2.28

nor D are xed-points of the system (2.5.7). Thus, the motion of the system cannot
come to a halt at B or D.
In order to get an idea of what happens in this model when = 1/
consider Figure 2.28 which is a replicate of Figure 2.15 under the assumption that
is large but nite. The long arrows which indicate the high adjustment speed in
income imply a nearly horizontal vector eld. If an initial point is chosen which
is not located on the curve Y = 0 the system approaches this curve very rapidly.
The points B  , C  , and D in this Figure represent those points which are analogous
to the points B , C , and D in Figure 2.27.78 At B  and D the vector eld points
upwards or downwards, respectively. However, as soon as the curve Y = 0 is left,
the strong inuence of the large dominates the motion of the system. It follows
that the system does not stop at B  or D but that it is leaving the points vertically
and a sharp orientation change takes place shortly afterwards. Thus, a limit cycle
behavior can be established in this model. Instead of the smooth, elliptical cycles
known from the discussion in the rst sections of this chapter, limit cycles in this
model are characterized by motions along the curve Y = 0 and very rapid motions
between points B  , D and the appropriate pieces of the Y = 0 curve.
Keeping in mind that a direct analogy is not possible for the Kaldor model, the
consideration of the case of a large, but nite value of in Figure 2.28 is helpful
78

A direct identication of the points is impossible in this Kaldor model. The reason
is not identical with the
consists in the fact that in this model the time derivative K
second state variable. For example, Chiarella (1990a), p. 25, considered a system of
the general form
x = f (x, y ),
y = x.

Guckenheimer/Holmes (1983), pp. 68f., investigate the van-der-Pol equation (2.3.3)

which can be transformed to a form similar to Chiarellas example.

2.6. Irreversibility and Determinism

77

in explaining the motion at the points B and D in Figure 2.27. When the system
approaches B or D, the trajectory jumps downwards or upwards to the points E or
A, respectively. The overall motion indicated in Figure 2.27 can be called an oscillatory motion though this motion is discontinuous at B and D.79 This oscillatory
behavior is indeed surprising because system (2.5.7) is effectively one-dimensional.
However, the restriction of the system to a manifold and the involved nonlinearity
are responsible for the emergence of cyclical behavior in this particular version of
the Kaldor model.80

2.6. Irreversibility and Determinism in Dynamical Systems

This chapter concludes with a short discussion of time irreversibility inherent in
many dynamical systems. It was described in Section 2.4 that conservative dynamical systems are characterized by the presence of an innity 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 rst oscillation. If an observer of this motion knows
the underlying differential equation system and the initial values of the state variables at a given point in time, he/she 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 of the time variable. Instead of counting time from t = 0
to t = in predicting the future, time is assumed to run from t = 0 to t = in
describing the past. This property of conservative dynamical systems was responsible for Laplaces famous statement on the predictability question (cf. Chapter 1).
In fact, many phenomena in celestial mechanics can be described by conservative
dynamical systems 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 elds.
Consider on the contrary a dissipative system which is characterized by the presence of (negative or positive) friction. A dissipative system always possesses attrac79

The term relaxation oscillation can be explained by these discontinuous jumps. Imagine
a rubber band spanned while the motion takes place on the manifold. At B and D the
rubber band is released implying a fast motion toward A and E .

80

For an indication that this type of dynamic behavior was not only known by mathematicians at the high tide of 2D systems at the end of the 1940s compare, e.g., Velupillai
(1990), pp. 20ff.

78

Chapter 2

tors or repellers, either in the form of xed points, limit cycles, orbits in higherdimensional phase space, or strange objects which are to be introduced later in this
book. A completely unstable dynamical system can be viewed as being attracted by
innity. In case of these dissipative systems it may still be possible to predict the
evolution of the system in the future but it may be impossible to determine where
the system started at a certain point of time in the past.

Irreversibility in Dissipative Systems

Figure 2.29

For example, let a dissipative system possess a unique xed-point attractor of

the focus type. If the observer exactly knows the underlying laws of motion, he or
she 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 2.29. In the limit,
the trajectories belonging to the two initial points will approach each other and will
spiral toward the xed-point attractor. Assume that the two trajectories need the
same time until they enter a certain ball around the xed point. If the system is
close to the attractor and the observer precisely knows the state of the system, then
it is possible to calculate the past of this point close to the xed point. Moving backwards on the trajectory belonging to 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 innity 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 xed point.
If the initial points of a dissipative dynamical system are located on the attractor,
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 cycle81 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,
81

The case of an initial point identical with a xed-point attractor is, of course, trivial.

79

2.6. Irreversibility and Determinism

Dissipative Systems
Conservative Systems

Time Reversible

Time Irreversible

On an attractor

On transients

Everywhere

Nowhere

Reversibility and Irreversibility in Dynamical Systems

Table 2.1

the determination of a points past is possible only if the coordinates of that point
are known with absolute precision.
These properties are summarized in Table 2.1. As dissipative systems are dominating economic dynamics, it can be concluded that backward prediction is practically impossible in most economic models.

Chapter 3

Bifurcation Theory and Economic Dynamics

his chapter deals with a subject that has become a major focus of research in
economic dynamics 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 denitive, 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 reect the inuence
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 dynamical systems, this chapter is separated into two sections, one which presents the most
important bifurcations in continuous-time systems and one which surveys discretetime systems. Though this may be viewed as being ponderous, the distinction forms
a bridge between the presentation of the regular nonlinear continuous-time systems
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 this section
that a discrete-time system emerges generically from a discrete time concept.

3.1. Preliminaries and Structural Stability Concepts

81

of Chapter 2 and the introduction of chaotic discrete-time systems in 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. Central to the presentation of the bifurcation behavior in both types of dynamical systems is the Hopf bifurcation which has recently gained the most attention in
economic dynamics. The presentation of the ip 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
xed point is affected. The global bifurcation behavior of a dynamical system over
the whole range of admissible values for the state variables will be the subject of
parts of the following chapters.

3.1. Preliminaries and Different Concepts of Structural Stability

This section introduces some basic notations and discusses the concept of structural
stability at some length. The presentation of the standard denition of structural
stability relying on the notion of topological equivalence is followed by short descriptions of other possible denitions and a discussion of the usefulness of the
concept in economic theory.

Preliminaries
Consider the ordinary differential equation2
x = f (x, ),

x R,

R,

(3.1.1)

with as a parameter. Assume that (3.1.1), for = 0 , has a xed point (x , 0 )

such that 0 = f (x , 0 ). The eigenvalue of the system (3.1.1) is given by =
f (x, )/x, and it is well-known that the xed point is locally asymptotically stable
as long as < 0 at (x , 0 ). Assume that, at (x , 0 ), the eigenvalue is equal to
zero. It follows from the implicit function theorem that the xed points of (3.1.1)
for values of different from 0 can be expressed as a smooth function x = x ()
if = 0 for =
 0 . The function x () describes branches of xed points. If,
at (x , 0 ), several branches of xed points come together, the point (x , 0 ) is
said to be a bifurcation point. The presentation of the branches of xed points in
(x ) space is called a bifurcation diagram. In Figure 3.1 the solid and dashed
lines depict branches of xed points. The solid lines represent stable xed points,
and the dashed line shows an unstable xed point.
2

The generalization of the notation to the n-dimensional case is straightforward. Cf.

Guckenheimer/Holmes (1983), pp. 118f., for the following denitions.

82

Chapter 3

A Bifurcation Diagram
Figure 3.1

As it can be seen from the bifurcation diagram, a former single xed point splits
(bifurcates) into several distinct xed points at the bifurcation point. The value of
at which the bifurcation occurs is called the bifurcation value of . If no bifurcation
occurs at a xed point (x , ), the xed point is said to be hyperbolic.
The bifurcation phenomenon can be related to the notion of structural stability.
Roughly speaking, a dynamical system is called structurally stable if the qualitative
dynamic properties of the system persist with small variations in its structure, i.e.,
when varying the parameters or considering small changes in the functional forms.
For example, if a dynamical system possesses a unique and asymptotically stable
xed point, structural stability implies that the xed point is unique and asymptotically stable for different parameter values as well. In other words, a dynamical
system is structurally stable if the two trajectories stay close together. A bifurcation
value 0 is therefore a value of for which the dynamical system is structurally
unstable.

Topological Equivalence and Structural Stability

The foregoing description of structural stability is supercial because nothing has
been said on the meaning of terms like qualitative properties or close together.
Depending on the denition of these terms, different notions of structural stability
can be distinguished in a more careful description.3
The most widespread denition of structural stability is usually attributed to the
Russian Gorki School (cf. Andronov/Chaikin (1949)). The similarity between two
dynamical systems is expressed in terms of the so-called topological equivalence:
3

Extensive discussions of the following concepts can be found in Abraham/Marsden

(1980), Arnold (1988), and Vercelli (1984).

83

3.1. Preliminaries and Structural Stability Concepts

Denition 3.1: Two dynamical systems are topologically equivalent if

there exists a homeomorphism4 from the phase space of the rst system to the phase space of the second system that transforms the phase
ow of the rst system to the phase ow of the second system.
Figures 3.2 and 3.3 illustrate the meaning of topological equivalence. Figure 3.2.a
depicts an attracting circle, i.e., a limit cycle. The elliptic attracting orbit in Figure
3.2.b differs from the circle in 3.2.a in a geometric sense, but the property of a
limit cycle persisted under the transformation. Imagine that Figure 3.2.b has been
generated by an appropriate stretching of Figure 3.2.a. The homeomorphism that
transforms 3.2.a to 3.2.b can be understood as a coordinate transformation.

3.2.a

3.2.b
Limit Cycles in Topologically Equivalent Dynamical Systems
Figure 3.2

Figures 3.3.a and 3.3.b show examples of two systems that are not topologically
equivalent. There does not exist a homeomorphism that can transform the limit
cycle in 3.3.a to the xed-point attractor in 3.3.b by stretching or squeezing the limit
cycle.
The notion of topological equivalence suggests the following denition of structural stability:5
Denition 3.2: A dynamical system is structurally stable if for every sufciently small perturbation of the vector eld the perturbed system is
topologically equivalent to the original system.
The term small perturbation is usually interpreted in terms of the C 1 norm: two
dynamical systems are close at a point x if the associated images, e.g., f (x) and g (x),
and the rst derivatives, f  (x) and g  (x), are close together.
4
5

A homeomorphism is a continuous map f : X Y ; X, Y Rn , with a continuous

inverse.
Cf. Arnold (1988), p. 90.

84

Chapter 3

3.3.a

3.3.b
Topologically Non-Equivalent Dynamical Systems
Figure 3.3

In the two-dimensional, continuous-time case structural stability in the sense of

Denition 3.2 can be established relatively easily. A theorem by Peixoto (1962)
says (among other things) that a dynamical system
x = f(x),

x R2

(3.1.2)

is structurally stable if 6
i) the xed points, i.e., {x | x = 0}, are hyperbolic, or
ii) every closed orbit is either a periodic attractor or repeller, or
iii) no trajectory connects two saddle-points, or
iv) the number of limit cycles is nite.
Denition 3.2 can be generalized when other descriptions of equivalence are used.
For example, Arnold (1988) introduced the concept of orbital equivalence in order
to include closed orbits in the class of structurally stable systems which differ by
their periods.

The Spectrum of Denitions and Generic Systems

Actually, an entire spectrum of varying denitions of structural stability can be imagined.7 The end points of this spectrum are characterized by two contradictory
positions: on the one hand, the attempt is made to specify the considered systems
6

Cf. Guckenheimer/Holmes (1983, p. 60, and Hirsch/Smale (1974), p. 314.

Cf. Vercelli (1984, 1989) for an intensive discussion.

3.1. Preliminaries and Structural Stability Concepts

85

as precisely as possible; on the other hand, one tries to include as many systems as
possible in the class of structurally stable systems. The aforementioned denition
that incorporates the notion of topological equivalence is unable to fulll both
requirements: too many dynamical systems turned out to be structurally unstable
in the sense of Denition 3.2.
Two-dimensional dynamical systems are well-understood and the concept of
structural stability in the sense of Denition 3.2 can be applied to these systems
without any difculties. After the extensive work of members of the Gorki School
on two-dimensional systems, the presumption emerged that Denition 3.2 could
serve as an instrument in describing so-called generic systems, i.e., systems with typical and generally valid dynamic properties. The culminating point of work on this
subject can be seen in Peixotos theorem which (in addition to the aforementioned
list of properties of structurally stable systems) says that structurally stable systems
are generic in the two-dimensional phase space.
Many different denitions of structural stability were constructed in order to nd
something similar to Peixotos theorem in higher dimensions. However, the work
of Smale (1963, 1967) has uncovered that structurally stable dynamical systems are
generic only in the two-dimensional phase space. There exist higher-dimensional
systems in whose neighborhood there is not a single structurally stable system. In
fact, this work laid the foundations for the investigation of chaotic dynamical systems
to be introduced in the next chapters.

Possible Problems with Structural Stability Concepts in Economics

The concept of structural stability introduced above is a mathematical concept
though the motivation for dealing with it originated in the natural sciences: for a
long time only those laboratory experiments were considered relevant which could
be repeated at any time under (necessarily) slightly different environmental conditions. A mathematical model that describes this experiment should therefore
possess the same property of qualitatively similar results under small perturbations.
Mathematics does dot necessarily have problems with the notions of slight or
small perturbations. It was mentioned above that the term is usually interpreted in
the sense of the C 1 norm with innitesimally small parameter variations. However,
research in applied sciences like economics often does not deal with innitesimal
changes but with nite variations in the parameters of a model. When such nite
variations are permitted in various denitions of structural stability, it turns out that
the concept becomes vague.
Imagine that a dynamical system changes its dynamic properties at a particular
bifurcation value 0 of a parameter. When a given system is perturbed by varying
, the system should be called structurally stable in the sense of Denition 3.2 as
long as < 0 . However, when a larger variation is considered such that > 0
the system should be called structurally unstable. Equivalently, when the system is
at 0 , an innitely small variation in changes its qualitative properties and it is
structurally unstable. The present value of the parameter and the magnitude of
its variation determine whether the system is structurally stable or unstable. The

86

Chapter 3

different variations in the parameter constitute a change in the norm underlying

the idea of a perturbation, but applied science has to accept the magnitude of a
(usually exogenous) parameter. In order to be formally correct, nite variations
in the parameters require a separate denition of the underlying norm in every
application of the concept of structural stability. From a practical point of view this
seems to imply a failure of the concept.
Economic theory encounters another problem which is seldom mentioned in
the mathematical and natural-science literature on structural stability. The concepts
mentioned above assume that the original and the perturbed systems possess the
same dimension. However, economic models are abstract pictures of real-life phenomena and only a few economic variables are taken into account in each model. It
is therefore important to know what happens when in a necessarily low-dimensional
model an additional variable is included in the list of interesting variables.
For example, consider the simple, linear, three-dimensional system
x 1 = x2 ,
x 2 = ax1 + bx2 + cx3 ,
x 3 = dx1 .

(3.1.3)

For c = 0, the rst two equations of the system (3.1.3) can be combined in the
linear, second-order differential equation
1 bx 1 ax1 = 0.
x

(3.1.4)

This second-order equation and the third equation of (3.1.3) still constitute a threedimensional system, but the relevant system in the form of (3.1.4) is two-dimensional:
the evolution of x3 follows that of x1 , and x3 has no inuence on the evolution of
the rst two variables at all. For c = 0, the system (3.1.3) can be written as the
third-order differential equation
bx
x
1 ax cdx1 = 0.

(3.1.5)

The dimension of the relevant system is now identical with the dimension of (3.1.3).
In general, it cannot be assumed per se that the dynamic behavior of (3.1.5) is similar
to that of the de-coupled system (3.1.4). This is particularly true when nonlinear
terms are involved on the r.h.s. of (3.1.3).8
Summarizing, the change in the dimension of the relevant system can imply a
change in its qualitative dynamic behavior. Alternative denitions of structural stability can take the change in the dimension into account: a system may be called
structurally stable if a change in the dimension of the system does not change its
dynamic properties. In fact, parts of this idea are realized in the elementary catastrophe theory which will be described in greater detail in Chapter 7.
8

If x 3 = f (x1 ) with f (x1 ) as a logistic curve, the so-called Shilnikov scenario emerges
which can imply chaotic motion. Cf. Section 5.4.1 for details.

87

3.2. Bifurcations in Continuous-Time Dynamical Systems

3.2. Local Bifurcations in Continuous-Time Dynamical Systems

This section deals with the change in the qualitative dynamic behavior of continuous-time dynamical systems when a parameter is changed at a xed point. In these
local bifurcations only the change in the stability properties of a xed point or the
emergence of closed orbits or additional xed points in a small neighborhood of a
xed point are considered.
The rst section deals with the simplest local bifurcations in which a xed point
changes its stability properties and/or additional xed points emerge. The emergence of closed orbits via a Hopf bifurcation is discussed in the second sub-section.

3.2.1. Fold, Transcritical, and Pitchfork Bifurcations

The following types of bifurcation will be presented only for the one-dimensional
case, i.e., for dynamical systems of the type
x = f (x, ),

x R,

R,

(3.2.1)

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

Fold Bifurcation
Consider the differential equation (3.2.1) and let (x , 0 ) = (0, 0) for simplicity.
Theorem 3.1 (Fold Bifurcation):9 Let f in (3.2.1) be C 2 and assume
that there is a xed point (x , 0 ) = (0, 0). If
(1)
(2)
(3)

f (0, 0)
= = 0,
x
2 f (0, 0)
= 0,
x2
f (0, 0)
= 0,

then, depending on the sign of the expressions in (2) and (3), there are
i) no xed points near (0, 0) if < 0 ( > 0), and
ii) two xed points near (0, 0) if > 0 ( < 0).
9

Cf. Guckenheimer/Holmes (1983), pp. 146 ff., for a generalized version of the theorem for the case x Rn . The following version is related to Whitleys (1983) formulation for discrete maps.

88

Chapter 3

The fold bifurcation is sometimes also called a saddle-node bifurcation. Conditions

(2) and (3) are called transversality conditions.10
Figure 3.4 illustrates the fold bifurcation for the prototype equation x = x2 .
The signs of the transversality conditions (2) and (3) are negative and positive,
respectively. If the parameter is lower than the bifurcation value 0 = 0, no xed
point exists. For > 0 , two branches of xed points emerge, one being stable and
the other being unstable. In other dynamical systems the bifurcation diagrams can
look differently. For example, when (3) has a negative sign, the bifurcation diagram
appears mirror-imaged with respect to the x-axis. If (2) is positive, the stability of
the two xed-point branches is reversed.

3.4.a: The Phase Portrait

3.4.b: The Bifurcation Diagram

The Fold Bifurcation
Figure 3.4

As an economic example of the fold bifurcation consider a simple partial-analytical model of the labor market. Let s (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.,



> 0.
w = d (w) s (w) ,
(3.2.2)
Assume that the demand function is parameterized by and let d (w) = bw
in the following. Assume that the labor supply function reects an inferiority such
that it is bending backwards for high values of w (cf. Figure 3.5).
In detail, let d2 s (w)/dw2 < 0 w and d s (w)/dw < 0 for w greater than a
value w0 . Denote the right-hand side of (3.2.2) as f (w, ) = d (w, ) s (w) and
let 0 be the value of such that f (w, 0 ) = 0 and f (w, 0 )/w = 0, i.e., there
is a xed point where the demand and supply functions are tangent. Obviously,
10

In the present context transversality should be read as the most general description
of a family of functions at a bifurcation point.

3.2. Bifurcations in Continuous-Time Dynamical Systems

89

A Labor Market with an Inferiority in the Labor Supply

Figure 3.5

f 2 (w, 0 )/w2 > 0 and f (w, 0 )/ > 0, and the conditions (2) and (3) of
Theorem 3.1 are fullled. Thus, a fold bifurcation occurs at the bifurcation value
0 . For > 0 no xed point exists. If < 0 , two branches of xed points emerge,

3.6.a: The Phase Portrait

3.6.b: The Bifurcation Diagram
A Fold Bifurcation in the Labor Market
Figure 3.6

one being stable and the other being unstable. Figure 3.6 shows the phase portrait
and the bifurcation diagram for this simple labor market model.

Transcritical Bifurcations
The fold bifurcation implies that no xed point exists for parameter values smaller
or larger (depending on the signs of (2) and (3)) than the bifurcation value. However, it often occurs in practical applications that dynamical systems have at least a

90

Chapter 3

so-called trivial xed point at the origin. The transcritical bifurcation deals with the
exchange of stability of a persisting xed point. If the xed point persists under
variations in , then f (0, ) = 0 . 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 f in (3.2.1) be C 2 and
assume that there is a xed point (x , 0 ) = (0, 0). If
(1)
(2)
(3)

f (0, 0)
= = 0,
x
2 f (0, 0)
= 0,
x2
f 2 (0, 0)
= 0,
(x)

then, depending on the sign of the expressions in (2) and (3),

i) the xed point x is stable (unstable) for < 0 ( > 0), and
ii) the xed point x becomes unstable (stable) for > 0 ( < 0) and
a branch of additional stable (unstable) xed points x() emerges.
The transcritical bifurcation is thus characterized by an exchange of stability of the
origin. Figure 3.7 shows the phase portrait and the bifurcation diagram of the
transcritical bifurcation for the prototype equation x = x x2 . The sign of the
transversality conditions (2) and (3) are negative and positive, respectively. For
< 0 = 0 the origin x = 0 is stable and a branch x () of unstable, negative xed
points exists. If > 0 , the xed point x = 0 becomes unstable and a branch of
stable, positive xed-point emerges.

3.7.a: The Phase Portrait

3.7.b: The Bifurcation Diagram
The Transcritical Bifurcation
Figure 3.7

3.2. Bifurcations in Continuous-Time Dynamical Systems

91

A Neoclassical Production Function with Incomplete Inada Conditions

Figure 3.8

If the sign of (3) were negative (instead of the positive sign in the prototype
equation), the bifurcation diagram in Figure 3.7.b would appear mirror-imaged. If
(2) had a positive sign instead, the stability of the xed points for different would
be reversed.
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,

(3.2.3)

with k as capital intensity, y 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 fulll the Inada
conditions, i.e., i) y (0) = 0, ii) y  (k ) > 0, iii) y  (k ) < 0, and iv) y  (0) = . Assume
that conditions i) - iii) hold but that the slope of y depends upon a parameter
with y (0)|=0 = 0 and y (k )/ > 0 k > 0 (cf. Figure 3.8).
Dene 0 as the value of such that, for given n and s, sy 0 (0) = n, i.e., the
eigenvalue is = 0. If < 0 , is negative and the origin is a stable xed point. Let
= 0 . The transversality conditions are fullled by assumption, i.e., y (k ) < 0 and
sy (k )/ > 0. Thus, a transcritical bifurcation occurs at = 0 such that the
origin becomes unstable and new xed points k > 0 emerge in a neighborhood
of k = 0 for increasing . Figures 3.9.a and 3.9.b show the phase portraits for the
two cases < 0 and > 0 .

Pitchfork Bifurcation
A nal example of a bifurcation in a one-dimensional continuous-time system is the
so-called pitchfork bifurcation. This bifurcation can occur in dynamical systems of
the form (3.2.1) with shapes of f similar to an odd function with respect to x, i.e.,

92

Chapter 3

3.9.a: < 0
3.9.b: > 0
Phase Portraits in a Neoclassical Growth Model for Different
Figure 3.9

f (x, ) = f (x, ).11 When f is an odd function, then the sufcient conditions
for a transcritical bifurcation are not fullled 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 f in (3.2.1) be C 3 and

assume that there is a xed point (x , 0 ) = (0, 0). If

(1)
(2)
(3)

f (0, 0)
= = 0,
x
3 f (0, 0)
= 0,
x3
2 f (0, 0)
= 0,
(x)

then, depending on the sign of the expressions in (2) and (3),

i) the xed point x is stable (unstable) for < 0 ( > 0), and
ii) the xed point x becomes unstable (stable) for > 0 ( < 0)
and two branches of additional stable (unstable) xed points x()
emerge.
Figure 3.10 shows the phase portrait and the bifurcation diagram for the prototype
equation x = x x3 . The signs of the transversality conditions (2) and (3) in
Theorem 3.3 are negative and positive, respectively, such that a so-called supercritical
11

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.

3.2. Bifurcations in Continuous-Time Dynamical Systems

93

3.10.a: The Phase Portrait

3.10.b: The Bifurcation Diagram
The Pitchfork Bifurcation
Figure 3.10

pitchfork bifurcation occurs with the bifurcating branches representing stable xed
points.
As in the case of the transcritical bifurcation, the bifurcation diagram in Figure
3.10 would appear mirror-imaged if the sign of (3) were reversed. If (2) were
positive, then the two emerging additional xed points would be unstable. In that
case, a subcritical pitchfork bifurcation would occur.
As an economic example, consider an abridged version of the Kaldor model
presented in Section 2.2.2. Assume that the investment function has the same
shape as in Figure 2.13, but let investment be independent of the capital stock.12
The model then reduces to the single goods market adjustment equation



Y = I (Y ) S (Y )

(3.2.4)

with the usual meaning of the symbols. Let Y denote the inner goods market
equilibrium in Figure 2.14, and formulate (3.2.4) in terms of the deviations from
the appropriate I and S levels:



y = i(y ) s(y ) ,
(3.2.5)
with y = Y Y , i = I I , and s = S S . Assume further that the investment
function can be parameterized such that the slope of i(y ) decreases for all y when a
parameter is increased, i.e., the investment response to deviations from the equilibrium level Y is getting smaller. In formal terms, let ds(y )/dy be a constant and
assume i2 (y, )/(y) > 0. The Kaldor assumption on the investment function
implies i3 (y, )/y 3 < 0 at y = 0.
Figure 3.11 shows the xed-point constellations for values of the parameter such
that the origin is unstable (solid line) and stable (dashed line).
12

This is, of course, the standard short-run macroeconomic approach, assuming that in
the short-run the inuence of investment on the capital stock can be neglected.

94

Chapter 3

A Parameterized Kaldorian Investment Function

Figure 3.11

3.12.a: < 0
3.12.b: > 0
Phase Portraits of an Abridged Kaldor Model for Different
Figure 3.12

Dene 0 as that parameter

 value for which the eigenvalue of (3.2.5) is zero, i.e.,
i(y, 0 )/y s(y )/y = 0. Then the conditions of Theorem 3.3 are fullled
and a pitchfork bifurcation occurs at 0 . Figure 3.12 shows the phase portraits for
different values of in this abridged Kaldor model.

Summary
The different bifurcation types with the associated transversality conditions and the
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.
All three of these bifurcation types can occur in higher-dimensional continuoustime 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

95

3.2. Bifurcations in Continuous-Time Dynamical Systems

Eigenvalue

Transversality
Condition

Prototype
Equation

Fold
Bifurcation

=0

f / =
 0
2
f /x2 = 0

x = x2

Transcritical
Bifurcation

=0

2 f /(x) = 0
2 f /x2 = 0

x = x x2

Pitchfork
Bifurcation

=0

2 f /(x) = 0
3 f /x3 = 0

x = x x3

Hopf
Bifurcation

i , i C
Rei = 0
Rei
>0

n.a.

x = y +



x (x2 + y 2 )
y = x+



y (x2 + y 2 )

Bifurcation Types in Continuous-Time Dynamical Systems

Table 3.1

while k eigenvalues are positive and nk 1 eigenvalues are negative. Furthermore,

the conditions on the single partial derivatives must be replaced by the appropriate
matrix expressions.13

3.2.2. 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 xed points or with the exchange of stability between
two branches of xed points. While these bifurcations are important dynamical
phenomena, another kind of bifurcation deserves attention in dynamical systems
theory, namely the bifurcation of a xed point into a closed orbit in a neighborhood
of the xed point. In contrast to the aforementioned bifurcations which can already
occur in one-dimensional dynamical systems, the Hopf bifurcation in continuous
time, named after E. Hopf (1942), requires an at least two-dimensional system.14
Consider the continuous-time system
x = f(x, ),

x Rn ,

R.

(3.2.6)

13

Cf. Sotomayor (1973) for further details.

14

It should be remembered that linear one-dimensional systems can generate only monotonic motion (cf. Appendix A.1.1). The same is true for the nonlinear analogs.

96

Chapter 3

Assume that (3.2.6) possesses a unique xed point x0 at the value 0 of the parameter, i.e.,
x = 0 = f(x0 , 0 ).

(3.2.7)

Furthermore, assume that the determinant of the Jacobian matrix J of (3.2.6), i.e.,
 f
f1
f1 

1
...


 x1
x2
xn 




.
.
.
.
.
.
.
.
det J = 
(3.2.8)
,
.
.
.
.


 f
fn
fn 

n
...


x1
x2
xn
differs from zero for all possible xed points (x, ). Consider a neighborhood
Br (0 ) R of the parameter value 0 . Then the implicit function theorem ensures
the existence of a smooth function x = x () for Br (0 ); i.e., for every in
the neighborhood there exists a unique xed point x .
Assume that this xed point is stable for small values of the parameter . (It
is also possible to consider a scenario with an unstable xed point for < 0 ; in
that case all of the following statements on 0 must be reversed). The Hopf
bifurcation theorem establishes the existence of closed orbits in a neighborhood of
a xed point for appropriate values of the parameter .15
Theorem 3.4 (Hopf bifurcation Existence Part): Suppose that the
system (3.2.6) has a xed point (x0 , 0 ) at which the following properties
are satised:
i) The Jacobian of (3.2.6), evaluated at (x0 , 0 ), has a pair of pure
imaginary eigenvalues and no other eigenvalues with zero real parts.
This implies that there is a smooth curve of xed points (x (), ) with
() of the
x (0 ) = x0 . The complex conjugate eigenvalues (),
Jacobian which are purely imaginary at = 0 vary smoothly with . If
moreover



d Re()
ii)
> 0,
d
|=0
then there exist some periodic solutions bifurcating from x (0 ) at =
0 and the period of the solutions is close to 2/0 (0 = (0 )/i).
When is increased from < 0 to > 0 , the single xed point changes its
stability because the real parts Re become positive. Figure 3.13 shows the Gaussian
15

There exist several versions of the Hopf bifurcation theorem. The following is a truncated version of Guckenheimer/Holmes (1983), pp. 151ff. For other versions see,
e.g., Alexander/Yorke (1978) and Marsden/McCracken (1976). Compare also Hassard/Kazarinoff/Wan (1981).

3.2. Bifurcations in Continuous-Time Dynamical Systems

97

The Eigenvalues in the Hopf Bifurcation

Figure 3.13

3.14.a: < 0
3.14.b: = 0
3.14.c: > 0
The Emergence of a Closed Orbit in the Hopf Bifurcation
Figure 3.14

plane with complex conjugate eigenvalues before and after a Hopf bifurcation. The
phase portraits for different parameter values are shown in Figure 3.14.
Theorem 3.4 establishes only the existence of closed orbits in a neighborhood of
x at = 0 , and it does not say anything about the stability of the orbits. Indeed,
the closed orbits may arise on either side of 0 . Consider rst the so-called subcritical
case in which closed orbits arise at < 0 . Closed orbits encircle stable xed points
x (). For > 0 , the xed points are unstable and no orbits exist. Figure 3.15
illustrates this subcritical Hopf bifurcation in the two-dimensional case. All points
on the axis represent xed points (x1 , x2 ) = (0, 0) of the system. For each < 0
in a neighborhood of 0 , a closed orbit exists. The union of these orbits forms the
paraboloid which is tangential to the planar cross section at 0 .

98

Chapter 3

Trajectories starting at initial values in a neighborhood of the orbits are repelled

from these orbits: initial points outside the orbits spiral away from the orbits, initial
points inside the orbits are attracted by the appropriate xed points.16

The Subcritical Case

Figure 3.15

In the second case of the so-called supercritical Hopf bifurcation the orbits arise
for > 0 . The xed points x () are unstable, and the orbits are attracting. For
0 the xed points are stable and no orbits exist (cf. Figure 3.14).
As a formal example of the occurrence of the Hopf bifurcation, consider the
prototype differential equation system



x = y + x (x2 + y 2 ) ,



y = x + y (x2 + y 2 ) .

(3.2.9)

System (3.2.9) possesses a xed point at x = y = 0. The Jacobian matrix of

(3.2.9) is


J=

16

3x2 y 2

1 2xy

1 2xy

3y x

,
2

(3.2.10)

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

The fact that the closed orbits dene basins of attraction can be used to relate the
sub-critical Hopf bifurcation to the notion of corridor stability: as long as an initial point
x(0) is located inside a region bounded by the closed orbit, x(t) will stay in the corridor
dened by the orbit and will eventually converge toward x .

3.2. Bifurcations in Continuous-Time Dynamical Systems

99

The Supercritical Case

Figure 3.16

which, evaluated at the xed point, is



J=


.

(3.2.11)

The determinant of (3.2.11) is det J =2 + 1, and the trace is tr J = 2. It follows

that the eigenvalues are 1,2 = 2 2 1 = 1. For = 0, the

eigenvalues are purely imaginary, and (Rei )/ = 1 > 0. The requirements i)
and ii) of Theorem 3.4 are therefore fullled and system (3.2.9) undergoes a Hopf
bifurcation at (0, 0) if = 0 = 0.
While the existence of closed orbits via the Hopf bifurcation theorem can relatively easily be established in most cases, the distinction between the sub- and
supercritical Hopf bifurcation is much more difcult. The usual procedure in determining which case prevails will be demonstrated with the prototype equations
(3.2.9).17
When the bifurcation value 0 = 0 is taken into account, the dynamical system
(3.2.9) can be written as
  
x
0
=
1
y

1
0

  

x
x3 xy 2
+
x2 y y 3
y

 
x
=L
+ g(x, y ).
y
17

(3.2.12)

Cf. Guckenheimer/Holmes (1983), pp. 150-156, or Marsden/McCracken (1976), pp.

63ff. and pp. 137ff. for discussions of this procedure.

100

Chapter 3

If the matrix L possesses a form as in (3.2.12), 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 Hopf 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
(3.2.12). Consider the expression18
b=


1
1
1
2
2
gxxx + gxyy
+ gxxy
+ gyyy
16

1
1 1
1
2
2
2
1
2
1 2
gxy (gxx + gyy
+
) gxy
(gxx
+ gyy
) gxx
gxx
+ gyy
gyy ,
16

(3.2.13)

T
with g(x, y ) = g 1 (x, y ), g 2 (x, y ) and the subscripts denoting 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 ) = x3 xy 2 and g 2 (x, y ) = x2 y y 3 , the partial derivatives are
1
gxx
= 6x,

1
gyy
= 2x,

1
gxy
= 2y,

2
= 6y,
gyy

2
gxx
= 2y,

2
gxy
= 2x,

1
gxxx
= 6,

1
gxyy
= 2,

2
gxxy
= 2,

2
gyyy
= 6.

(3.2.14)

It follows that b = 16/16 = 1 < 0. The emerging cycle of system (3.2.9) is

therefore attracting, i.e., a supercritical Hopf bifurcation occurs in this example.
This procedure can imply technical difculties during the necessary transformation of the generic system to the normal form (3.2.12). Furthermore, in the
n-dimensional case (n 3) a reduction of the dynamical system to its center manifold 19 must be performed, which in most cases is impossible in face of the typically
numerically unspecied economic models.
Summary
In order to demonstrate the existence of a Hopf bifurcation in a concrete system it
is thus sufcient to show that by increasing the parameter :
complex eigenvalues exist or emerge,
the real parts of the pairs of complex conjugate eigenvalues are zero at the
bifurcation value = 0 ,
all other real eigenvalues differ from zero at = 0 ,
18

Cf. Guckenheimer/Holmes (1983), p. 152. The expression is the square root in

= + i. In the Jacobian matrix (3.2.11), is equal to 1.

19

Cf. Guckenheimer/Holmes (1983), pp. 123 ff., and the Appendix A.2.

3.2. Bifurcations in Continuous-Time Dynamical Systems

101

the real parts of the complex conjugate eigenvalues differ from zero for > 0 .

In addition, the stability of the emerging cycles should be studied with the help of
the method mentioned above.
Though applications of the Hopf 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 fullled without difculty only in two- and three-dimensional cases. In higher-dimensional systems with
n 4 the bifurcation values 0 can often be calculated only by means of numerical
algorithms.
The following two sub-sections contain two economic examples of the emergence of a Hopf bifurcation. Other applications can be found in, e.g., Benhabib/
Miyao (1981) and Zhang (1990), Chapter 3, who re-considered a monetary growth
model, Dockner (1985), Dockner/Feichtinger (1989, 1991), Feichtinger/Novak/Wirl (1991), Feichtinger/Sorger (1986) containing optimal control problems from various economic elds, Feichtinger (1988) who studied an advertisement model, Semmler (1986) who investigated a macroeconomic model with nancial crises in the Minsky tradition, Diamond/Fudenberg (1989) and Lux (1992)
who established cycles in a search-and-barter model with rational expectations, and
Zhang (1988) who elaborated upon multisector optimal growth. The cyclical behavior in a Keynes-Wicksell monetary growth model was studied by Franke (1992).

3.2.2.1. The Hopf Bifurcation in Business-Cycle Theory

This section describes the application of the Hopf bifurcation theorem to two
Kaldorian-type, descriptive business cycle model. The two-dimensional model discussed in the rst part of this section represents the standard Kaldor model already
known from Section 2.2.2. The three-dimensional model in the second part includes an interest-rate dynamics and can be considered an IS LM growth-cycle
model.
The case n = 2
Recall the familiar Kaldor model outlined in Section 2.2.2, which serves as a prototype model in nonlinear economic dynamics:



Y = I (Y, K ) S (Y ) ,
(3.2.15)
= I (Y, K ) K.
K
In order to avoid possible conicts with the assumptions of some theorems, perform
a coordinate transformation such that the system is centered at the xed point
(Y , K ). Let y = Y Y , k = K K , i = I I , and s = S S . The system
(3.2.15) then turns into



y = i(y, k ) s(y ) ,
(3.2.16)
k = i(y, k ) k.

102

Chapter 3

Assume that s(y ) is linear, and that i(y, k ) can be separated such that i(y, k ) =
i1 (y ) + i2 (k ). The part i2 (k ) is assumed to be linear. For the derivatives of i1 (y )
assume that i1y (0) > 0, i1yy (0) = 0, and i1yyy (0) < 0.
The Jacobian of (3.2.16) is


J=

(iy sy )

ik

iy

ik


,

(3.2.17)

with the determinant

det J = (iy sy )(ik ) iy ik ,

(3.2.18)

and the trace

tr J = (iy sy ) + (ik ).

(3.2.19)

The characteristic equation is

2 + a + b = 0,

(3.2.20)

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

1,2 = a/2

a2 /4 b,

(3.2.21)

and it follows that the xed point is locally stable if and only if the real parts are
negative. In order to exclude a saddle point, the determinant (3.2.18) is assumed
to be positive (i.e., b > 0 ). The xed point is then asymptotically stable if a =
tr J > 0 = tr J < 0:
(iy sy ) + (ik ) < 0.

(3.2.22)

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 parameterize the Kaldor model,
the choice of the adjustment coefcient on the goods market as the bifurcation
parameter seems to be obvious.20 With (iy sy ) > 0 at the xed point y = 0 and
ik = constant, it can directly be seen that there exists a value = 0 for which
0 (iy sy ) + (ik ) = 0,
20

(3.2.23)

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

in a discrete-time version of the Kaldor model. Compare also Section 4.2.2.

3.2. Bifurcations in Continuous-Time Dynamical Systems

103

implying that the complex conjugate roots cross the imaginary axis. As, for > 0 ,
the real parts are becoming positive, 0 is indeed a bifurcation value of the Kaldor
model.
Inspection of (3.2.17) shows that the model is not expressed in its normal form.
Evaluated at the bifurcation point, i.e., taking (3.2.23) into account, the centered
Kaldor model can be written as
  
y
(ik )
k =
iy

ik (ik )/(iy sy )
ik

 
y
+ g(y, k ),
k

(3.2.24)

with g(y, k ) as nonlinear terms which can be derived from a Taylor expansion of
(3.2.16). As the expression (3.2.13) 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 ) = 0 i(y ) s(y ) L1 i(y ) = 0 i(y ) s(y ) + (ik )y,
(3.2.25)



g 2 (y ) = i(y ) L2 i(y ) = i(y ) iy y,



with Li i(y ) as the linear parts expressed by the matrix terms in (3.2.16).
In order to transform (3.2.24) into the desired normal form, consider the coordinate transformation21
 
 
y
u
=D
k
v

D=

with

d11
d21

d12
d22


.

(3.2.26)

The entries of D are

d11 = 0,
d12 = 1,

14 (f11 f22 )2 f12 f21
,
d21 =
f12
f11 f22
d22 =
,
2f12

with fij as the entries in the Jacobian (3.2.17), evaluated at the bifurcation point.
The inverse of D is
1

21

1
=
d21

d22
d21

1
0


.

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

(3.2.27)

104

Chapter 3

The matrix D transforms the coordinate system (y, k ) into a new coordinate system
(u, v ). The linear part of (3.2.24) is transformed into
 
 
u
u
1
,
=D JD
v
v
(3.2.28)

 
u
0
f12 d21
,
=
f12 d21
0
v

i.e., into the normal form with f12 d21 = (ik )2 + ik iy (ik )/(iy sy ). The
nonlinear terms g i (y ) are transformed in the following way. The variables (y, k ) are
expressed in the (u, v ) system according to (3.2.26). Multiplication yields y = v ;
the expression for k is not needed in this example because the nonlinear functions
gi do not involve terms in k . Finally, the vector D1 g has to be calculated:22




 1



L
i
(
v
)

s
(
v
)
(
v
)
0
1
g (v )



,
= D1
(3.2.29)
g 2 (v )
i(v ) L2 i(v )










L
i

i
i
(
v
)

s
(
v
)
(
v
)
(
v
)
+
L
(
v
)
d
1
2
1 22 0
.


=




d21
d21 0 i(v ) s(v ) L1 i(v )
The functions



d22 

1

0 i(v ) s(v ) + (ik )v +
i(v ) iy v ,
g (v ) =
d21
d21

d22
1 0 d22
1

iy d22 (ik ) v +
=
i(v ) +
0 s(v ),
d21
d21
d21



g 2 (v ) = 0 i(v ) s(v ) + (ik )v,
1

(3.2.30)

depend only on the new variable v . Expression (3.2.13) therefore reduces to

b=

1 1
1 1 2
g g .
gvvv +
16
16 vv vv

(3.2.31)

The partial derivatives of g 1 in (3.2.31) are

1
gvv
=

1 d22 0
ivv = 0,
d21

2
gvv
= 0 ivv = 0,
1
gvvv
=
22

1 d22 0
ivvv .
d21

The inverse matrix has to be multiplied with the vector g because D originally appears
on the left-hand side of (3.2.24) when the original transformation is applied.

3.2. Bifurcations in Continuous-Time Dynamical Systems

105

As ivvv is negative by assumption, the expression b is negative if (1 d22 0 )/d21 is

positive. The reader may verify that the assumptions made thus far are not sufcient
to establish a positive sign of the coefcient. Whether or not the cycle is indeed
attracting depends on the particular numerical specication 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 PoincareBendixson theorem, because it may be more difcult to nd the necessary invariant
set on whose boundary the vector eld points toward the interior of the set 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 establish the existence of closed orbit.
As an example consider an augmented IS-LM business-cycle model:23



Y = I (Y, K, r) S (Y, r) ,



r = L(r, Y ) M ,
= I (Y, K, r) K,
K

(3.2.32)

with r as the interest rate, L(r, Y ) as the money demand, and M as the constant
money supply. The model can also be considered a Kaldor model augmented by
an interest-rate dynamics. In particular, it will be assumed that investment depends
on income in the typical Kaldorian, sigmoid form.
The Jacobian matrix of (3.2.32) is

J=

(IY SY )

(Ir Sr )

IK

LY

Lr

IY

Ir

IK

(3.2.33)

with the characteristic equation

3 + a2 + b + c = 0,
23

(3.2.34)

Compare Boldrin (1984, 1988) for a similar model. Compare also Section 5.2.2 containing a few remarks on the possibly inappropriate specication of the interest-rate
adjustment equation.

106

Chapter 3

and


a = tr J = (IY SY ) + Lr + (IK ) ,
b = Lr (IK ) + (IY SY )(IK ) IY IK
+ (IY SY )Lr LY (Ir Sr ),


c = det J = Lr (IY SY )(IK )

(3.2.35)


LY (Ir Sr )(IK ) + IK (LY Ir IY Lr .

The coefcient b represents the sum of the principal minors of the Jacobian J.
In case of a third-order polynomial like (3.2.34) it is a little bit more difcult to
examine the qualitative properties of the eigenvalues. Equation (3.2.34) has one
real and two complex conjugate eigenvalues if the discriminant,
= A2 + B 3 ,

(3.2.36)

is positive with
A=

a3
c
ab
+

27
6
2

and

B=

b a2
.
3
9

(3.2.37)

While in the two-dimensional case the stability of the xed point is determined
by the sign of the trace of J, the three-dimensional case is slightly more difcult to
analyze. A very helpful criterion in proving the local stability of a dynamical system
is the Routh-Hurwitz criterion.24 In the three-dimensional case the real parts of the
eigenvalues are negative if
a, b, c > 0

and ab c > 0.

(3.2.38)

Making use of the root theorem of Vieta, i.e.,

3


i = a

i=1

and

3


i = c,

i=1

it can be shown that the real parts of the complex conjugate eigenvalues are zero
and that there is no other real eigenvalue which equals zero if
a, b, c = 0

and ab c = 0.

(3.2.39)

Assume that the discriminant in (3.2.36) is always positive in order to assure

that the three eigenvalues consist of one real and two complex conjugate roots.
24

See, e.g., Dernburg/Dernburg (1969), pp. 214ff., Gandolfo (1983), p. 248ff., or the
remarks in Appendix A.1.1.

3.2. Bifurcations in Continuous-Time Dynamical Systems

107

Let be the bifurcation parameter and assume an initial value of such that the
Routh-Hurwitz conditions are fullled. An increase in implies a/ < 0, and,
eventually, a will be equal to zero. An increase in implies an increase in c because
c/ = c/; when c is positive by assumption (in order to exclude a saddle point)
for low values of it will stay positive for high values of . The sign of b/ is
ambiguous but the existence of a value 0 with the consequence ab c = 0 can
nevertheless be demonstrated. With a/ < 0, the product ab will eventually be
equal to zero at a value , implying that ab c = c < 0. It follows that there must
be a value 0 < at which ab c = 0 and a > 0, i.e., 0 is a bifurcation value. The
sum ab c is a quadratic expression in implying that two bifurcation values 01
and 02 exist. The sign of b/ is responsible for the number of positive bifurcation
values.
The fact that a pair of purely imaginary eigenvalues and a non-zero real eigenvalue exists at the bifurcation value(s) 0 can be seen from Orlandos formula:25 The
expression abc (which is actually the determinant of one of the Hurwitz matrices)
equals
ab c = (1 + 2 )(1 + 3 )(2 + 3 ).

As the product of all three eigenvalues equals c < 0 according to Vietas formula,
it is impossible to encounter a real zero eigenvalue. When the case of a saddle point
is explicitly excluded,26 a pair of real eigenvalues cannot come with opposite signs.
It follows that ab c = 0 can only be fullled when a pair of eigenvalues is purely
imaginary. For values of > 0 , the expression ab c becomes negative according
to the above consideration. Thus, the conjugated pair of complex eigenvalues i , j
which assures ab c = 0 cannot still imply i + j = 0. It follows that the real parts
of the complex conjugate eigenvalues differ from zero for > 0 . This completes
the demonstration of the emergence of a Hopf bifurcation in system (3.2.32). The
system possesses closed orbits in a neighborhood of the bifurcation point.
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 threedimensional system (3.2.35) to its center manifold (cf. Appendix A.2).27 The calculations are tedious, and there is not much hope to derive simple stability conditions.

3.2.2.2. Closed Orbits in Optimal Economic Growth

The Hopf bifurcation theorem can be applied to economic models in other elds
than business cycle theory which is explicitly attempting to model oscillatory mo25

Cf. Gantmacher (1954), Chapter 16.7.

26

Unfortunately, a positive c is necessary but not sufcient for excluding a saddle point.

27

Cf. Guckenheimer/Holmes (1983), pp. 123ff. Economic examples of the use of center
manifolds in the investigation of higher-dimensional systems can be found in Chiarella
(1990) and in Reichlin (1987).

108

Chapter 3

tions. 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.
The literature on optimal control in the 1960s and 1970s was dominated by the
search for the assumptions necessary and/or sufcient for 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 inaccurateness 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.
However, the saddle-point stability/instability property of a xed point does not
represent the only possible dynamic phenomenon in optimal control models. Benhabib/Nishimura (1979) and Medio (1987) have demonstrated that it is possible
to establish (at least locally) the existence of closed orbits in models of optimal
economic growth. Consider the general, multi-sector optimal growth problem formulated by Benhabib/Nishimura (1979):28


max
y




e(n) U (T (y, k) )dt

s.t. k i = yi nki ,

(3.2.40)

i = 1, . . . , n,

with y = (y1 , . . . , yn ) as the vector of per-capita outputs yi in sector i, k = (k1 ,

. . . , kn ) as the vector of per-capita stocks of capital, T (y, k) = c as the macroeconomic consumption frontier, U () as the utility derived from consumption, as the
discount rate, and n as the population growth rate.
The Hamiltonian function of problem (3.2.40) is



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

(3.2.41)

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

c
T
=
= pj ,
yj
yj
T
c
=
= wj ,
kj
kj
28

Compare also Zhang (1988).

(3.2.42)

3.2. Bifurcations in Continuous-Time Dynamical Systems

109

with yj y, kj k and pj p and wj w as the product prices and rental prices of

good j , respectively, it follows that
k j = yj nkj ,
j = U k wj + j ,

(3.2.43)

j = U k pj ,

or
k j = yj (k, p) nkj ,

(3.2.44)

p j = wj (k, p) + pj ,

if U  = 1.29 The Jacobian matrix of (3.2.44) is



J=

( y/ k) nI

( y/ p)

( w/ k)

( w/ p) + I

(3.2.45)

which, under some additional assumptions on the technology set and competition,
can be written as
 k

B nI ( y/ p)
,
J=
(3.2.46)
k
0
B + I
with B and I as matrices. As the Jacobian (3.2.46) is quasi-triangular, the characteristic roots are given by the roots of the matrices B nI and B + I, respectively.
Assume that the determinants of both matrices are positive, and that the eigenvalues are complex conjugate. If there is a value = 0 such that the roots are purely
imaginary, and if the real parts of the eigenvalues are increasing for increasing , a
Hopf bifurcation occurs at 0 implying that closed orbits arise in a neighborhood
of the xed point with y j = p j = 0 j .
Depending on the value of the bifurcation parameter , it is thus possible that
the optimal control trajectory is oscillating. On a rst 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 inuenced 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. The rate can be predetermined by a social consensus and
institutional arrangements.
The usual argument in justifying governmental interventions into the market
processes points out that in some cases
29

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

110

Chapter 3

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

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

basically 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 uctuate. 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 monotone, 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.30

3.3. Local Bifurcations in Discrete-Time Dynamical Systems

This section deals with discrete-time dynamical system which either emerge genuinely in dynamic models with a discrete, nite time concept, or which can be
interpreted as Poincare maps31 of continuous-time dynamical systems. Consider a
one-parameter, discrete-time, one-dimensional map f : R R R: 32
xt+1 = f (xt , ),

x R,

R.

(3.3.1)

Let x be a xed point of (3.3.1), i.e., x = f (x , ). The asymptotic stability of

the xed point x depends on whether the slope of f , evaluated at the xed point,
lies within the unit circle, i.e., whether |df (x )/dx| = || < 1. Bifurcations, i.e.,
changes in the qualitative behavior of (3.3.1) can therefore occur only when the
eigenvalue takes on the value +1 or 1.

3.3.1. Fold, Transcritical, Pitchfork, and Flip Bifurcations

The rst three bifurcation types are essentially equivalent to their analogs in continuous-time dynamical systems. The appropriate theorems represent adaptions of the
continuous-time versions to the discrete-time case and are therefore only briey
mentioned in the following.

30

Compare also Foley (1986).

31

Cf. Section 5.1 for details.

32

The following presentation is to a large degree stimulated by the survey in Whitley

(1983).

3.3. Local Bifurcations in Discrete-Time Dynamical Systems

111

Fold, Transcritical, and Pitchfork Bifurcations

These bifurcations types can occur in dynamical systems having an eigenvalue =
+1 at the bifurcation point. The possible bifurcation types are summarized in Table
3.2. The transversality conditions for the different bifurcation types are the same
for continuous-time and discrete-time dynamical systems. 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, )
with the 450 line represent the xed points of the mappings. Figure 3.17 shows the
graph of the prototype mapping xt+1 = x2t for the fold bifurcation and different
values of . Figure 3.18 contains a description of the transcritical bifurcation in the
prototype equation xt+1 = xt x2t . The pitchfork bifurcation in the prototype
equation xt+1 = xt x3t is shown in Figure 3.19.
It is easily possible to modify the economic examples provided in Section 3.2.1
such that they fulll the requirements of the appropriately modied theorems for
discrete-time systems.

Flip Bifurcation
A bifurcation type which is unique to discrete-time dynamical systems is the ip
bifurcation. Assume that a xed point x exists, i.e., f (x , 0 ) = x , and that its
eigenvalue is equal to 1.
Theorem 3.5 (Flip Bifurcation)33 Let f : R R be a one-parameter
family of mappings such that f0 has a xed point x with eigenvalue
1. If, at (x , 0 ),


f 2 f
2f
(1)
 0
+2
=
x2
x
 3 
 2 2
f
f
(2)

2
3
=a=
 0,
x3
x2
then, depending on the signs of the expressions in (1) and (2),
i) the xed point x is stable (unstable) for < 0 ( > 0 ), and
ii) the xed point x becomes unstable (stable) for > 0 ( < 0 ),
and, additionally, a branch of stable (unstable) xed points of order
2 emerges which enclose x .
A xed point of order 2 is a xed point of the second iterate of (3.3.1), i.e., of the
mapping



xt+2 = f (xt+1 ) = f f (xt ) .
(3.3.2)
33

Cf. Whitley (1983)

112

Chapter 3

The Fold Bifurcation in a One-Dimensional Map, xt+1 = x2t

Figure 3.17

The Transcritical Bifurcation in a One-Dimensional Map, xt+1 = xt x2t

Figure 3.18

The Pitchfork Bifurcation in a One-Dimensional Map, xt+1 = xt x3t

Figure 3.19

3.3. Local Bifurcations in Discrete-Time Dynamical Systems

113

Denote the second iterate of the mapping as f f = f (2) . A xed point of order 2
is therefore a xed point of the mapping f (2) , i.e., x = f (2) (x ).
For obvious reasons the ip bifurcation is often also called a period-doubling bifurcation. If the sign of the expression in (2) is negative, the emerging xed points
of order 2 are stable, i.e., xt permanently switches between two values x1t and x2t .
In that case, the bifurcation is called a supercritical ip bifurcation. The prototype
equation of the ip bifurcation is xt+1 = xt x2t (cf. Figure 3.20 with a < 0).34
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 xed points (of order 1) emerge, while in the case of the ip bifurcation
two components of a xed point of order 2 emerge.

The Supercritical Flip Bifurcation

Figure 3.20

If a > 0 in Theorem 3.5, the xed point x is stable and the emerging xed
point of order 2 is unstable. In that case, the bifurcation is said to be a subcritical
ip bifurcation.
Consider the following very simple economic example from population economics.35 In nearly all economic models in which the population size changes over
time it is assumed that the population growth rate is constant, i.e.,
Nt+1 Nt
= n,
Nt

(3.3.3)

with Nt as the size of the population 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.
34

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.

35

Compare West (1985), pp. 150ff., for the following model.

114

Chapter 3

The assumption of an unrestricted population growth was criticized relatively

early.36 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 = (1 Nt /M ),

> 0,

M > 0,

Nt M t.

(3.3.4)

The constant M serves as a saturation level of the population: if the population

increases, 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%.

3.21.a: The Growth Factor

3.21.b: The Mapping (3.3.6)
Population Growth Depending on the Population Level
Figure 3.21

Substitution for n in (3.3.3) yields

Nt+1 Nt
= (1 Nt /M ) 1,
Nt

(3.3.5)

Nt+1 = Nt (1 Nt /M ).

(3.3.6)

or

The growth factor (3.3.4) and the mapping (3.3.6) are illustrated in Figure 3.21.
Obviously, the coefcient in (3.3.6) stretches the graph vertically. Denote the
right-hand side of (3.3.6) as f (Nt , ).37 Let 0 be the value of such that there
36

Cf. Verhulst (1845, 1847) for an early critique of Malthus assumptions. Cf. also West
(1985), p. 101, for a discussion.

37

The variable M is assumed to be constant.

3.3. Local Bifurcations in Discrete-Time Dynamical Systems

115

is a xed point of the mapping, i.e., N = f (N , 0 ), with an eigenvalue =

f (N , 0 )/N = 2N/M = 1. Simple calculation shows that the conditions
(1) and (2) of Theorem 3.5 are fullled, namely




N2
2
2N

= N
+2 1
M
M
M
2
6 2
< 0 > 0
=
4
2
 3 
 2 2

2
f
f
3
2
= 2(0) 3
<0
x3
x2
M


(1)

(2)

f 2 f
2f
+2
x2
x

Thus, a ip bifurcation occurs at = 0 , . Instead of the monotone population

growth under the Malthusian assumption, the time path of xt is now characterized
by a permanent period-2 cycle in the population level. From an empirical point
of view, this may be considered as articial as the former hypothesis. However, it
will be demonstrated in Chapter 4 that there may be a sequence of ip bifurcations such that the time path of xt can eventually be described as irregular.38 The
ip bifurcation can therefore be viewed as a transition to more complex dynamic
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.

3.3.2. The Hopf Bifurcation in Discrete-Time Dynamical Systems

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 R2 . Unfortunately, a generalization of the theorem to n-dimensional
systems does not exist. The following result is essentially due to Ruelle/Takens
(1971):39
Theorem 3.6 (Hopf bifurcation Existence Part): Let the mapping
xt+1 = F(xt , ), xt R2 , R, have a smooth family of xed points
38

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 .

39

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

Holmes (1983).

116

Chapter 3

Transversality
Condition

Prototype
Equation

Fold
Bifurcation

=1

f / =
 0;
2
f /x2 = 0

xt+1 = x2t

Transcritical
Bifurcation

=1

2 f /(x) = 0;
2 f /x2 = 0

xt+1 = xt x2t

Pitchfork
Bifurcation

=1

2 f /(x) = 0
3 f /x3 = 0

xt+1 = xt x3t

Flip
Bifurcation

= 1

(f /)( 2 f /x2 )+



+2 2 f /(x) = 0



2 3 f /x3


2
3 2 /x2 = 0

xt+1 = xt x2t

Bifurcation Types in Discrete-Time Dynamical Systems

Table 3.2

x () at which the eigenvalues are complex conjugate. If there is a 0

such that
mod (0 ) = 1
and

but

n (0 ) = 1,

n = 1, 2, 3, 4




d mod (0 )
> 0,
d

then there is an invariant closed curve bifurcating from = 0 .

A comparison of Theorem 3.6 with Theorem 3.4 uncovers the analogy of this theorem with the Hopf 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 = 1 at the
bifurcation point = 0 . Furthermore, it is required that the roots do not become
real when they are iterated on the unit circle: the rst four iterations n must also be
complex conjugate. Finally, the eigenvalues must cross the unit cycle with nonzero
speed for varying at 0 .
Theorem 3.6 establishes only the existence of closed orbits in systems that undergo a Hopf bifurcation. The stability of the orbits can be demonstrated in a way
similar to the procedure described for continuous-time systems.40
40

See Guckenheimer/Holmes (1983), pp. 162-165 for details on stability proofs.

3.3. Local Bifurcations in Discrete-Time Dynamical Systems

117

The value of the modulus can be determined by the following simple consideration. The characteristic equation is:
2 + a + b = 0

(3.3.7)

with the solution

1,2 = a/2

a2 /4 b.

(3.3.8)

In the case of complex

 eigenvalues, (3.3.8) can be written as 1,2 = 1 2 i with
1 = a/2 and 2 = b a2 /4. The modulus is dened as
mod() =

12 + 22 .

It follows that the modulus equals the square root of the determinant b:
mod() =

a2 /4 + b a2 /4 =

b.

(3.3.9)

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



Yt+1 = Yt+1 Yt = I (Yt , Kt ) S (Yt , Kt ) ,
Kt+1 = Kt+1 Kt = I (Yt , Kt ) Kt ,

(3.3.10)

or



Yt+1 = I (Yt , Kt ) S (Yt , Kt ) + Yt ,

(3.3.11)

Kt+1 = I (Yt , Kt ) + (1 )Kt .

The Jacobian matrix of (3.3.11) is



J=

(IY SY ) + 1

(IK SK )

IY

IK + (1 )


,

(3.3.12)

with





det J = (IY SY ) + 1 IK + 1 IY (IK SK ).

(3.3.13)

The eigenvalues are complex conjugate if

(tr J)2
.
det J >
4

(3.3.14)

118

Chapter 3

Assume that the inequality holds. A Hopf bifurcation occurs at a value = 0 if

det J|=0 = 1:




(IY SY ) + 1 IK + 1 IY (IK SK ) = 1

0 =

IK
.
(IY SY )(IK + 1 ) IY (IK SK )

(3.3.15)

Note that it is not assured that the bifurcation value 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
is changed:



d
det J
d |()|
=
d
d
|=0

1/2



= 1/2 (IY SY ) + 1 (IK + 1 ) IY (IK SK )



(IY SY )(IK + 1 ) IY (IK SK )
IK
=
> 0.
(3.3.16)
20
Provided that the iterates n , n = 1, . . . , 4, on the unit circle remain complex conjugate roots, the requirements of Theorem 3.6 are fullled, and a Hopf bifurcation
occurs when = 0 . Without inspecting the sign of a specic expression containing third-order derivatives of the nonlinear parts in (3.3.11), nothing can be said
about the stability of the 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 Goodwins predator-prey model, augmented by a markup pricing relation. 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).

Chapter 4

Chaotic Dynamics in Discrete-Time

Economic Models

he presentation of nonlinear dynamical systems in the preceding two chapters

uncovered 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 modeled 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. Nonlinear 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 specication
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. Figure 4.1 illustrates this kind of dynamic behavior for
a one-dimensional difference equation. This unexpected property of some nonlinear deterministic dynamical systems is responsible for the label chaotic behavior ,
deterministic chaos, deterministic noise, or just chaos. However, it should be noted from
the beginning that several denitions of chaos exist which emphasize different
aspects of the dynamic behavior in a given system.

120

Chapter 4

Stylized Chaotic Time Series

Figure 4.1

Chaotic motion can exist in very simple nonlinear dynamical systems. Therefore
the question arises of why this behavior has found attention in nearly all formally
oriented scientic 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 current research in the eld,1 began to perform numerical experiments with a uid 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 investigations of
chaotic dynamical systems can only be understood once the actual emergence of a
strange attractor has been followed on a graphics terminal.2
1

Y. Ueda actually presented an earlier example of a strange attractor, cf. Ueda (1992).

Any reader without programming experience but who has access to a microcomputer is
strongly advised to examine the Phaser program by Kocak
(1986). The program allows
the inspection of the behavior of all standard examples in dynamical systems theory in
a simple and relatively fast way. A faster and more sophisticated program is Dynamics, written and circulated by J.A. Yorke. The program also includes algorithms for the
calculation of (still) more esoteric things like basin boundaries, saddle-straddle trajectories, etc. 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. The most important numerical calculations can be performed
with the Insite program (cf. Parker/Chua (1989)). A speedy, highly integrated, and

4.1. Chaos in One-Dimensional, Discrete-Time Models

121

It is obvious that random-like 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 inuences are therefore assumed to being superimposed on regular
motion in linear systems for reasons of a realistic description of actual series and/or
the persistence of cycles in otherwise dampened oscillations. The chaos property
of some nonlinear dynamical systems can provide an alternative to this resort to
non-economic forces in descriptive explanations of actual time series. In addition,
the presence of chaotic motion can contribute to 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 dynamic economic models. The presentation of the mathematical concepts necessary for understanding these economic applications is thus limited, yet
hopefully sufcient. The relevant literature will be given as often as possible for
readers interested in more in-depth mathematics.3 This chapter deals with chaotic
dynamics in discrete-time dynamical systems. Chaotic motion in one-dimensional,
discrete-time models in dynamic economic models is introduced in the rst section.
A short overview of chaotic properties of higher-dimensional dynamical systems and
a discussion of economic applications are contained in Section 4.2. Discussions
of the properties of continuous-time dynamical systems and numerical techniques
used to describe chaotic motion in a more quantitative manner are postponed to
the following Chapters 5 and 6.

4.1. Chaos in One-Dimensional, Discrete-Time Dynamical Systems

Recent mathematical studies of one-dimensional, discrete-time, nonlinear systems
show that even very simple systems can behave in a very complicated dynamical
manner. 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:
easy-to-use program with high-quality graphics is the DMC program described in Medio
(1993). A nice collection of graphical illustrations of the behavior of nonlinear dynamical systems can be found in the multivolume book by Abraham/Shaw (1983). Users
of the Mathematica program should consult Anderson (1993) and Eckalbar (1993).
3

In recent years a large number of introductory texts on chaotic dynamics has been
published. 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, in Devaney (1992) with a lot of geometrical illustrations, in Ruelle (1991) who provides a non-technical survey and discusses essential implications
of nonlinear dynamical systems, and in Schuster (1984). More advanced expositions
can be found in Collet/Eckmann (1981), Devaney (1986), Guckenheimer/Holmes
(1983), Ruelle (1989, 1990), Wiggins (1988), and, with an emphasis on economics,
Medio (1993). Good survey articles are, e.g., Eckmann (1981) or Ott (1981). Economically motivated introductions to the denitional framework can be found in Baumol/
Benhabib (1989), Brock (1986), Brock/Dechert (1991), Brock/Hsieh/LeBaron
(1991), Chen (1988a), Kelsey (1988), and Samuelson (1990).

122

Chapter 4

The mathematical properties of one-dimensional dynamical systems are much

better understood than the properties of higher-dimensional systems.
Many phenomena typical for higher-dimensional, discrete-time and continuoustime dynamical systems can be illustrated with one-dimensional maps.
Most economic examples of complicated dynamical behavior are framed in onedimensional difference equations.

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

discrete-time maps and provides several economic examples from descriptive and
optimal economic growth theory. A short survey of other examples can be found
in Section 4.1.4.

4.1.1. Basic Concepts

This section is divided into two parts. The rst 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, a more exact denition of
chaos and several theoretical results are presented.4

A Heuristic Introduction to One-Dimensional Chaos

Consider the one-dimensional, discrete-time system
xt+1 = f (xt , ),

xt R,

R,

(4.1.1)

with xt as the state variable and as a parameter. Assume that there are values
a and b such that f (a, ) = f (b, ) = 0, i.e., the graph of f crosses the xt -axis
twice. Furthermore, assume that there is a critical value xc for which f  (xc ) = 0 and
f  (xt ) > (<) 0 xt < (>) xc . A map with these properties is called a unimodal map.
For example, let (4.1.1) be the concave quadratic function
xt+1 = f (xt , ) xt (1 xt ),

xt [0, 1],

[0, 4],

(4.1.2)

which is the so-called logistic equation or Verhulst dynamics, already introduced in

Section 3.3.1.5 This one-dimensional map is non-invertible, i.e., while xt+1 is unambiguously given for a certain xt , the inverse xt = f 1 (xt+1 ) yields two values of
4

For detailed treatments of one-dimensional, discrete-time systems compare Collet/

Eckmann (1980), Devaney (1986, 1992), Grandmont (1988), Lauwerier (1986), Preston (1983), Singer (1978), and Whitley (1983).
Irregular and seemingly stochastic motion has been known to exist in this equation for
a long time. As early as in 1947, Ulam/Neumann (1947) mention the possibility of
using the logistic equation (4.1.2) with = 4 as a quasi-random-number generator on
computers. The recent interest in the equation was stimulated by Mays (1976) famous
Nature article.

123

4.1.1. Basic Concepts

xt for a single xt+1 . The map is said to be an endomorphism. For [0, 4], the
interval [0, 1] of the state variable is mapped onto itself. The graph of the function
f (xt , ) = xt (1 xt ) is stretched upwards when is increased, while the points
of intersection with the xt axis do not change (cf. Figure 4.2).

The Logistic Equation for Different Values of

Figure 4.2

The map (4.1.2) possesses two xed points, namely the origin, x = 0, and
1
x = 1 ,

> 0.

(4.1.3)

When 0 < < 1, the second xed point in addition to the origin is negative (and
is thus located outside of the interval [0, 1]. For = 1, a transcritical bifurcation
occurs at the origin (cf. Section 3.2.1.): while the origin is stable for < 1, it
becomes unstable for > 1. The second xed point turns from an unstable xed
point (x < 0) into a stable xed point (x > 0). This stable xed point increases
with an increasing , i.e., x = x ().
As was demonstrated in Section 3.3.1., a non-invertible map like (4.1.2) undergoes a ip bifurcation when is sufciently large: the xed point x () > 0 is
stable as long as the slope of f (xt , ) at x () is absolutely smaller than 1. As the
absolute value of the slope increases everywhere (except at the critical point) when
is increased, there will be a value of (possibly outside of the interval [0, 4])
such that the xed point x () becomes unstable (cf. Figure 4.3). The slope of the
graph of equation (4.1.2) is
df (xt )
= (1 2x ) = 2 ,
dxt |x=x

(4.1.4)

implying that a ip bifurcation occurs for = 3 [0, 4]. The formerly stable xed
point becomes unstable and a new stable xed point of period 2 (also called period-2

124

Chapter 4

cycle or xed point of order 2) emerges: the state variable xt switches permanently
between the two components of the xed point, i.e., x1 = x3 , x2 = x4 , x3 = x5 , etc.,
but xt = xt+1 .

4.3.a. stable

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

The emergence of a xed point of period 2 in a map like (4.1.2) can also be
demonstrated in an alternative way.6 Dene the second iterate as
f (2) : R R R :


xt+2 = f (xt+1 , ) = f f (xt , ),
f (2) (xt , ).

(4.1.5)

For the logistic equation, the second iterate f (2) (xt , ) is

f (2) (xt , ) = xt+2 = (xt+1 x2t+1 )

and xt+1 = (xt x2t )




= xt+2 = (xt x2t ) 2 (xt x2t )2 .

(4.1.6)

Two graphs of the map f (2) for different values of are depicted in Figure 4.4. The
graphs possess the same points of intersection with the xt axis, they are symmetric
with respect to a vertical line at the critical point xc = 0.5, and display two peaks and
a valley. When is small, the peaks and the valley are not very pronounced. The
two peaks are stretched upwards and the valley is deepened when is increased.
If is small and a single non-trivial xed point (x , ) is stable, the graph of f (2)
can intersect the 450 line only once at the xed point x > 0 (cf. Figure 4.4.a). This
is necessarily the case because a xed point of the map f (xt , ) with the property
x1 = x2 = x is also a xed point of the map f (2) (xt , ) with the property x1 = x3 ,
6

The following period-doubling scenario is very clearly described in Baumol/Benhabib

(1989) and Devaney (1992). Baumol/Benhabib (1989) also present numerically exact
plots of the graphs of f (2) and higher iterates.

4.1.1. Basic Concepts

125

4.4.a.
4.4.b.
The Second Iterate of the Logistic Equation for Different Values of
Figure 4.4

x2 = x4 , etc. When is increased, the peaks are stretched upwards and the valley
is deepened, implying that the graph of f (2) (xt , ) will eventually be tangent to the
450 line at the xed point x with a slope of f (2) (xt , ) = +1.
The relation between this positive slope of f (2) (xt , ) and the slope of f (xt , )
follows from



df f (xt , ),
df (2) (xt , )
df (xt+1 , ) df (xt , )
=
=
,
(4.1.7)
dxt
dxt+1
dxt
dxt

where use has been made of the chain rule of differentiation. As xt = xt+1 = x at

the xed point, the slope of f (2) (xt , ) therefore equals f (2) = f  f  with a prime
denoting the partial derivative with respect to the rst argument. It has already
been shown that the ip bifurcation occurs at = 3 with a slope of f  = 1 at the
xed point (cf. (4.1.4)). Consequently, the slope of f (2) at this bifurcation point is
|f  f  | = 1.
When is larger than its bifurcation value for the ip bifurcation, the graph
of f (2) (xt , ) intersects the 450 line three times for positive xt , namely at the now
unstable xed point of f (xt , ) and at the two components xi , i = 1, 2, of the
period-2 xed point with the property that xi = f (2) (xi , ), i = 1, 2.
The period-2 xed point of the map f (2) (xt , ) is stable as long as the slope of
the graph, evaluated at the components of the period-2 xed point, is absolutely
smaller than one, i.e., if
 (2)

 df (xt , ) 

 < 1.
(4.1.8)


dxt
It follows from (4.1.7) that the slope of f (2) (xt , ) at the components xi , i =
1, 2, equals the product of the derivatives f  evaluated at the two components, i.e.,

126

Chapter 4


f (2) (xj , ) = f  (xi , ) f  (xj , ). The slopes of f (2) at the two components are
therefore identical. In Figure 4.4.b the graph has been drawn in such a way that
the period-2 xed point is stable.

4.5.a.
4.5.b.
The Fourth Iterate of the Logistic Equation for Different Values of
Figure 4.5

When is increased even further, the slope of the graph of f (2) at the two
components xi , i = 1, 2, will eventually be (absolutely) larger then one, and the
stability condition (4.1.8) will be violated. In order to demonstrate what kind of
bifurcation behavior occurs at the value of for which the period-2 xed point
becomes unstable, it is useful to consider the fourth iterate, i.e., the system dened
by
f

(4)

: RRR:

(4)

(xt , ) = xt+4


 



.
= f f f f (xt , )

(4.1.9)

A graph of f (4) (xt .) is shown in Figure 4.5.a for a value of such that the period2 cycle is stable. The graph intersects with the 450 line at the two components
of the period-3 cycle and the previous unstable xed point. The same arguments
as above on the slope of the graph and the stability of the xed points apply in
this case. When is increased, several new peaks and valleys appear in the graph
of f (4) (xt , ) which are stretched upwards or downwards, respectively. Eventually,
seven points of intersection exist (in addition to the origin) (cf. Figure 4.5.b). The
two components of the previous period-2 cycle and the very rst unstable xed point
of f are described by the intersections with a positive slope of f (4) . The remaining

4.1.1. Basic Concepts

127

four points of intersection represent a stable period-4 cycle, i.e., a cycle described
by x1 = x5 , x2 = x6 , x3 = x7 , x4 = x8 , etc., xi = xi+m , m < 4.
This procedure can be continued in order to describe the emergence of a period8 cycle, period-16 cycle, and so on. 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 xed point, etc., persists for increasing in an interval. Figure 4.6
shows a stylized bifurcation diagram of this period doubling scenario. The interesting
observation in this bifurcation diagram consists in the fact that the sequence of

Stylized Period-Doubling Bifurcations

Figure 4.6

bifurcation values for which a period-doubling bifurcation occurs converges to

a cumulation point c . Feigenbaum (1978) made the important observation that
in the logistic equation this sequence of period-doubling bifurcation values follows
the rule7


n n1
lim
= 4.6692 . . . .
(4.1.10)
n
n+1 n
If two successive bifurcation values are known, the next bifurcation value can be
calculated from (4.1.10).8 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 c 3.5699 . . . . More important, it has been shown that is a universal constant
because it characterizes the period-doubling behavior in many one-dimensional
non-invertible maps. In addition, other universal constants can be derived from
7

Cf. Collet/Eckmann (1980), p. 37.

For example, if the rst
two bifurcation values 1 = 3. and 2 = 3.449 are known,
applying (4.1.10) yields (1 + )2 1 / = 3 3.54.

128

Chapter 4

the logistic equation and can also be found in similar equations.9 It is this prototype character of the logistic equation which justies its usually long expositions in
textbooks. In addition, the basic qualitative properties of the logistic equation can
be found in dynamical systems generated by a coordinate transformation of the original system. Consider the two one-dimensional maps f : X Y and f : X Y ,
X, Y, X , Y R, and let h: R R be a diffeomorphism.10 When the relation
between the two systems can be expressed in the form of the diagram
f
X Y



1 h
1 h
h 
h 
X

(i.e., when the diagram commutates) then f = h f h1 is a dynamical system

conjugated with f by the diffeomorphism h.11
For values of above the critical value c , phenomena other than period doubling can be observed. Figure 4.7 contains a numerical plot of the bifurcation
diagram of the logistic equation.12 The majority of values has a large number of
associated xt values. In addition to 2n cycles, xed points with all even periods k can
emerge for appropriate values. Furthermore, when is sufciently large, xed
points with odd periods occur. Figure 4.8 illustrates the emergence of a period-3
xed 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, i.e., for which xt+n = xt n > 0.
9

10

11

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-2n1 cycle which is closest
to the critical value. Then the ratio dn /dn+1 = 2.50 . . . is another universal
constant.
Cf. Section 4.2.1 for a precise denition. Roughly speaking, a diffeomorphism is a continuous map with a continuous inverse.



For example, the diffeomorphism h(x) = 2 arcsin x / transforms the logistic equation f (x) = 4x(1 x), x [0, 1], into the tent map (cf. Figure 4.12)
xt+1 =

2x
if

2(1 x ) if

0 x < 0.5,
0.5 x 1.

Important properties like the value of the Lyapunov exponent (cf. Chapter 6) are identical for both systems.
12

Such a diagram is generated in the following way: x a certain and an initial value
x0 and calculate the sequence {xt }T
0 , T large, and drop the rst elements such that
transients do not appear in the diagram. Then repeat the procedure for other equally
spaced values of .

4.1.1. Basic Concepts

129

A Numerical Plot of the Bifurcation in the Logistic Equation

xt+1 = xt (1 xt ), [2.8, 4]
Figure 4.7

While for many values in Figure 4.7 it is impossible to determine by visual

inspection whether the vertical xt -values represent a stable cycle of order k , k large,
or aperiodic behavior, the diagram uncovers structure. The cloud of xt values
disappears for several intervals of values, and low-order periodic cycles prevail.
These regions of values are called windows.

4.8.a: xt+1 = f (xt , )

4.8.b: xt+3 = f (3) (xt , )
Period-3 Fixed Points in the Logistic Map
Figure 4.8

Without providing a precise denition at this place, the simultaneous presence

of periodic cycles of order k and of aperiodic cycles will synonymously be called deterministic chaos, deterministic noise, or complex behavior in the following. The parameter
regime c < 4 in the logistic equation is called the chaotic regime.
In the chaotic regime in Figure 4.7 the x values belonging to a given seem
to be equally distributed over an interval. This impression can be veried by the

130

Chapter 4

A Histogram of a Fictitious Time Series

Figure 4.9

following experiment: calculate the time series from a given map, e.g., the logistic
equation, with a sufcient number of elements, say 10,000 data points. Divide
the admissible x interval [0, 1] into m subintervals of equal length. For example,
consider 20 subintervals, each of which is 1/20 of the total length of the admissible
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 4.9, the number of data
points of a ctitious time series falling into each of the 20 subintervals is plotted on
the ordinate against the x values of the subintervals.
If a dynamical system possesses a stable xed point, the data points will accumulate in an interval containing the xed point. If transients are excluded from
the time series (e.g., the rst 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 nite number
of nonzero ordinate values in the different subintervals. Finally, if a time series is
chaotic and no stable orbit exists, each interval will be visited by the time series with
a more or less equal probability. Figure 4.10 is a histogram of the logistic equation
xt+1 = 4xt (1 xt ) for 50,000 data points. The interval [0, 1] has been divided into
200 sub-intervals. It can be seen that the connection of the ordinate values in each
interval forms a nearly continuous curve. As no distinguished peaks are observed
in this curve, it can be concluded that the time series visits nearly every subinterval with the same probability, i.e., that the deterministic time series behaves like a
purely stochastic time series.13
13

Occasionally, the binned series can be approximated by continuous density functions.

For example, the curve in the histogram in Figure 4.10 can be approximated by the
density function
a
g=

 1/ 2 .
x(1 x)
Cf. Collet/Eckmann (1980), p. 16, and Day/Pianigiani (1991) for details.

131

4.1.1. Basic Concepts

x
A Histogram for the Logistic Equation xt+1 = 4xt (1 xt ); 200 Intervals
Figure 4.10

xt+1

xt
Ergodic Behavior in the Logistic Equation; = 3.99
Figure 4.11

The dynamic behavior depicted in the histogram above is called ergodic behavior.
Roughly speaking, a system is said to exhibit ergodic behavior if the majority of

132

Chapter 4

initial points visit every region in phase space with about equal probability. Figure
4.11 demonstrates this behavior in the familiar (xt , xt+1 ) diagram: for sufciently
large , the entire diagram will be lled by the trajectory when the number of
iterations tends toward innity.
One-dimensional maps have become
popular not only because of the ergodic
character of some cycles, but because of a
phenomenon which has already been indicated in Figure 4.1: two initial points
which are close together develop in a
completely different way as time passes.
The difference between the initial states
may be arbitrarily small, but nevertheless
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
The Tent Map
calculate the sequence {xt } belonging to
Figure 4.12
an initial value x0 . This phenomenon is
called sensitive dependence on initial conditions. When a dynamical system possesses
this property, its behavior is called mixing. Theoretically it may be difcult to establish whether or not a map like (4.1.2) displays a mixing behavior. A map that is
particularly suited for analytical investigations is the tent map

xt+1 =

axt
b(1 xt )

0 xt 0.5
0.5 < xt 1.

if
if

(4.1.11)

Figure 4.12 shows the graph of this map for the parameter values a = 2 and b = 2.
For these parameters the interval [0, 1] is mapped to itself. The next section provides an introduction to some analytical methods that allow for establishing ergodic
and mixing behavior. It will be shown that measures like Lyapunov exponents can
easily be calculated for this map and that the map indeed displays mixing behavior.

Deterministic Chaos
Ergodicity



Mixing



Stochasticity

Sensitive Dependence
Table 4.1

4.1.1. Basic Concepts

133

This brief survey ends with a description of a phenomenon which can be observed in several time series generated by deterministic dynamical systems.14 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 4.13 illustrates this intermittent behavior with a map, the graph
of which comes close to the 450 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. When the trajectory has left the intermittency region the typical large variations in xt can again be
observed.15

Intermittency in a One-Dimensional Map

Figure 4.13

Some Results for One-Dimensional Maps

The foregoing presentation has uncovered that the dynamic behavior of one-dimensional maps can be rather complicated. This section provides a short overview of
some analytical results. The question of whether the dynamic 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
importance to complex behavior in one-dimensional maps. The following theorem
of Sarkovskii (1964) provides an answer to why period-3 cycles play a dominant
role for chaotic dynamics:16
14

Cf. Berge et al. (1984), pp. 226ff., for details.

15

Occasionally, the term intermittency is also used to describe the windows in a bifurcation
diagram: intervals of values with associated clouds of xt values are superseded by
intervals of with low-order cycles in xt .

16

Cf. Guckenheimer/Holmes (1983), p. 311.

134

Chapter 4

Theorem 4.1 (Sarkovskii (1964)): Consider the following ordering

of all positive integers:
1 2 4 8 16 . . . 2k 2k+1 . . .
......
k+1
k+1
. . . 2 (2n + 1) 2 (2n 1) . . . 2k+1 5 2k+1 3 . . .
. . . 2k (2n + 1) 2k (2n 1) . . . 2k 5 2k 3 . . .
......
. . . 2(2n + 1) 2(2n 1) . . . 2 5 2 3 . . .
. . . (2n + 1) (2n 1) . . . 9 7 5 3.
If f 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).17 If this number is 12 (= 22 3), then all cycles of
order 2k , (k = 0, . . . , ), 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 renowned Li/Yorke theorem:
Theorem 4.2 (Li/Yorke):18 Let J be an interval and let f : J J be
continuous. Assume there is a point a J for which the points b = f (a),
c = f (2) (a), and d = f (3) (a) satisfy
da<b<c

(or d a > b > c).

Then
i) for every k = 1, 2, . . . there is a periodic point in J having period k .
Furthermore,
17

Alternatively, a period-4 point does not necessarily imply the existence of a period-8
point, which is ranked higher in this ordering.

18

Cf. Li/Yorke (1975), p. 987.

4.1.1. Basic Concepts

135

ii) there is an uncountable set S J (containing no periodic points),

which satises the following conditions:
A. For every p, q S with p =
 q
lim sup | f (n) (p) f (n) (q ) |> 0,
n

and
lim inf | f (n) (p) f (n) (q ) |= 0.
n

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

lim sup | f (n) (p) f (n) (q ) |> 0.
n

The properties described in (ii A.) and (ii B.) of the theorem express the aforementioned sensitive dependence on initial conditions (SDIC):
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 chaos.19
Chaos in the Li/Yorke sense is also called topological chaos. This type of chaotic
behavior does not exclude that the observable motion is indeed regular, i.e., nonchaotic without any sensitive dependence on initial condition when (for a given
value of ) most initial points converge toward a period-k cycle. The Li/Yorke
theorem implies the existence of a scrambled set S of initial points with aperiodic
orbits and SDIC but it does not say anything on the size of this set. In fact, the
set of initial points with true chaotic properties (i.e., with the properties of the
scrambled set) can have Lebesgue measure zero, meaning that the initial points in
the interval [0, 1] which imply aperiodic orbits and SDIC are isolated and do not
form sub-intervals on the line. When the map possesses a stable period-k cycle,
almost every initial point (in the sense of Lebesgue measure) converges toward the
period-k cycle.20
19

Subsequent results by Li/Misiurewicz/Pianigiani/Yorke (1982) have extended the

period-3 requirement to the case of odd periods 3.

20

Cf. Guckenheimer (1979) and Nusse (1987).

136

Chapter 4

Aperiodic points do exist, but they do not necessarily attract initial points. It
follows that true chaos might be unobservable even though the set S is uncountable.21 From a practical point of view this fact may not be extremely important.
The presence of the scrambled set inuences the evolution of initial points in the
transient phase (cf. Section 4.3 for details) which eventually converge to a periodic
orbit. For example, the periodic orbits displayed in the windows in the bifurcation diagram in Figure 4.7 are typically approached in the form of a complicated
transient which often cannot be distinguished from true chaotic motion (cf. Figure
4.14). Furthermore, as the bifurcation diagram has been obtained from a numerical experiment it can also not be excluded that the apparent chaotic regions in the
diagram represent nothing else than extremely long transients.

Time
Transient Chaotic Motion in a Period-3 Window of the Logistic Map; = 3.83.
Figure 4.14

Theoretical attempts to provide conditions under which true chaotic motion is

indeed observable make use of measure theory. It can be shown that true chaos is
observable when, for a given value of the parameter , a chaotic set S has a positive
absolutely continuous invariant measure (with respect to the Lebesgue measure). When
this measure is positive, the set of initial points converging toward the chaotic set
S will have positive Lebesgue measure as well.22 It has been demonstrated that
several one-dimensional maps indeed possess such positive measures.23 These maps
include the tent map displayed
 4.12 and the logistic map with = 4. In

in Figure
fact, the density g = a/ x(1 x) mentioned above in the context of Figure
4.9 and 4.10 is an absolutely continuous, invariant, positive measure for the logistic
21

Occasionally, chaos in the Li/Yorke sense with most initial points converging toward
stable orbits is called thin chaos; observable chaos with SDIC is also called thick
chaos, cf. the discussion between Day (1986) and Melese/Transue (1986).

22

For detailed discussions of this measure-theoretic approach to chaotic dynamics compare Collet/Eckmann (1980), pp. 149ff., Day/Pianigiani (1991), Eckmann/Ruelle
(1985), Medio (1993), Chapter 2, and Ruelle (1990), Part II.

23

Cf. Jacobson (1981), Lasota/Yorke (1973), and Pianigiani (1981).

137

4.1.1. Basic Concepts

map (with = 4).24 In the rest of this book, the measure-theoretic approach will
not be deepened. Instead, a method will shortly be described that allows to exclude
the existence of stable periodic cycles in some cases. When no stable periodic cycle
exists for a particular parameter value, the aforementioned remarks on the possible
unobservability of true chaotic motion with SDIC are not valid anymore.
In order to determine whether a discrete-time, one-dimensional map has one
or several stable orbits introducing the following notion is useful.25
Denition 4.1 (Schwarzian derivative):
one-dimensional map
xt+1 = f (xt ),

Consider a C 3 -continuous

x R.

The derivative f S (xt ) at a point x with f  = 0, dened as


2
f  (xt ) 3 f  (xt )
f (xt ) = 

,
f (xt )
2 f  (xt )
S

is called the Schwarzian derivative of f .

The Schwarzian derivative preserves its sign under composition, i.e., if, for example,
f S (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:
Theorem 4.3 (Singer (1978)):26 Consider the map xt+1 = f (xt )
which maps a closed interval I = [0, b], b > 0, onto itself. If
f is C 3 ,
f has one critical point c with f  (x) > 0 x < c, f  (c) = 0, and
f  (x) < 0 x > c,
iii) f (0) = 0 and f  (0) > 1, i.e., the origin is a repelling xed point.
iv) f S (xt ) 0 x I \ {c}.

i)
ii)

then f has at most one stable periodic orbit in the interval I.

If conditions i)-iv) hold true the map f is sometimes also called S -unimodal.27 As an
example, consider the logistic equation (4.1.2). Obviously, f is C and the origin
is a repelling xed point. Furthermore, as f  = 2xt , f  = 2, and f  = 0,
24

Cf. Day/Pianigiani (1991).

25

Cf. Singer (1978) and Collet/Eckmann (1980), Chapter II.4, and Preston (1983),
pp. 60ff., for details on the following ideas.

26

See also Nusse (1986).

27

Cf. Collet/Eckmann (1981), pp. 94f.

138

Chapter 4

4.15.a

4.15.b
Orbits Starting at the Critical Point of a Map
Figure 4.15

the Schwarzian derivative is negative for all x [0, 1] except at the critical point
xc = 0.5. Therefore, f has at most one stable orbit according to Theorem 4.3.28
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:29
Theorem 4.4: If a map f has a stable periodic orbit, then the critical
point xc will be attracted to it.
Figures 4.15.a and 4.15.b show two examples of iterations of the critical point xc
in the quadratic map. In Figure 4.15.b the critical point happens to be located in
a stable period-4 cycle. It is obvious that the critical point can never be mapped
to the origin because f (xc ) is always smaller than xmax = 1 in this case. In Figure
4.15.a, the critical point xc is mapped to the origin within two iterations. As the
origin is a repeller, the system therefore does not possess a stable periodic orbit. In
the quadratic map (4.1.2), this situation can only occur if = 4.

4.1.2. Chaos in Descriptive Growth Theory

This section presents the two probably simplest ways to model economies with complex dynamic 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.
28

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

29

Cf. Collet/Eckmann (1981), p. 14.

4.1.2. Chaos in Descriptive Growth Theory

139

As a pioneer in detecting chaotic dynamics in economic systems, Day (1982) reconsidered the standard neoclassical growth model. In discrete time and assuming
that the capital stock exists for exactly one period30 the model is expressed as
Yt
It
St
Yt

= Ct + It ,
= Kt+1 ,
= Yt Ct = sYt ,
= F (Kt , Lt ),

Lt = (1 + n)t Lo ,

s > 0,

(4.1.12)

n > 0,

with the usual meaning of the symbols, n as the constant growth rate of the population, and s as the constant marginal savings rate. The production function is
linear-homogeneous, implying that the model can be reduced to
Kt+1
= sF (Kt , Lt )/Lt
Lt

or kt+1 (1 + n) = sf (kt ),

(4.1.13)

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

Under the usual convexity assumption, the map possesses two xed points: a
repelling xed point at the origin and an asymptotically stable xed point k which
solves k = sf (k )/(1 + n).
In contrast to the usual neoclassical assumption, let the production function
have the following form:
Yt
= f (kt ) = Bkt (m kt ) ,
Lt

kt m = constant.

(4.1.14)

The term (m kt ) reects the inuence of pollution on per-capita output. When

the capital intensity increases, pollution increases as well. Suppose that resources
have to be sacriced in order to avoid this pollution. The maximum output which
can be produced with a given capital stock is then smaller than the output in the
standard textbook case for each value of k . The constant term m acts like a saturation level, implying that per-capita production falls to zero when kt = m. Substituting for the production function in (4.1.13) yields
kt+1 =

sBkt (m kt )
.
(1 + n)

(4.1.15)

Consider rst a simplication and let = = m = 1. Equation (4.1.15) reduces

to
kt+1 =
30

sBkt (1 kt )
.
(1 + n)

(4.1.16)

This assumption does not have essential consequences. The shape of the resulting map
is unaltered when a gradual depreciation is assumed.

140

Chapter 4

Let = sB/(1 + n). Equation (4.1.16) is then formally identical with the logistic
equation (4.1.2), and all properties of (4.1.2) apply to (4.1.16) as well.
Consider next the general ve-parameter equation (4.1.15). The graph of
(4.1.15) can be modied by variations in the parameters. For example, increasing the parameter B stretches the graph upwards. B therefore plays essentially the
same role as in (4.1.2). In order to apply the Li/Yorke theorem to (4.1.15), consider the following three distinguished values of k . Let k c be the critical point of the
map (4.1.16), i.e., the value of kt that implies the highest possible capital intensity
in the next period:

dkt+1
sB
1
kt (m kt ) kt (m kt )1 = 0
=
dkt
1+n
(m kt )
kt (m kt )
= kt
=
kt
m kt
m
.
= k c =
+

(4.1.17)

When B is sufciently large, k c is lower than the xed point k . Next, let k b be the
result of the backward iteration k b = f 1 (k c ). When k c < k , k b will be smaller
than k c .

A Neoclassical Growth Model with Pollution

Figure 4.16

Finally, let k m denote the maximum attainable capital intensity, i.e., the intersection of the graph of (4.1.15) with the abscissa. Variations in B eventually imply that
the graph of (4.1.15) is stretched upwards such that k m is the forward iteration of
k c : f (k c ) = sB/(1 + n)(k c ) (m k c ) = k m (cf. Figure 4.16). As k m is mapped
to the origin, the following relations between the k values result:
0 < kb < kc < km

4.1.2. Chaos in Descriptive Growth Theory

141

f (k m ) < k b < f (k b ) < f (k c )

f 3 (k b ) < k b < f (k b ) < f 2 (k b ).

Thus, the requirements of the Li/Yorke theorem are fullled. The map (4.1.15)
is chaotic in the Li/Yorke sense for appropriate values of the parameters. Furthermore, applying Theorem 4.4 shows that for specic values of B there is no stable
periodic orbit: in Figure 4.16 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 xed point of
the map, the map cannot have a stable period orbit. In this case, there may exist
initial points with a sensitive dependency. When B is lower than the value assumed
in Figure 4.16, Theorems 4.3 and 4.4 cannot be applied because the Schwarzian
derivative is not unambiguously negative31 and because the forward orbit of the
critical point is not as simple as in Figure 4.16.
This neoclassical growth model (which now can be called a prototype model
in chaotic, discrete-time, dynamical economics) is a modication of the standard
textbook approach to growth theory, and a generalization of the results found for
this modied version is, of course, impossible. However, noninvertible maps can
be shown to exist in basic traditional models without any modications of the functional forms. An example was provided by Stutzer (1980).
Stutzers model was one of the very rst economic investigations of chaotic
dynamics. 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
Y = KN a ,

K > 0,

0<a<1

(4.1.18)

as the production function with a xed capital stock.32 The growth rate of employment is assumed to be
N
N
= ,
N
Y

, > 0,

(4.1.19)

i.e., the growth rate increases when per-capita output (income) increases.
Combining (4.1.18) and (4.1.19) yields the rst-order nonlinear differential
equation
2a

N
N = N
.
K
31

(4.1.20)

For example, a somewhat tedious calculation shows that the Schwarzian derivative is
f S (kt ) =

2

2
m2

3 2

m mkt kt2
m 2kt
4mkt + 4kt2
4
2

for the specic values = 0.5 and = 0.5.

32

The assumption of a xed capital stock is, of course, an oversimplication, and it is

surely problematic to speak of a growth model in this context.

142

Chapter 4

Equation (4.1.20) can be interpreted as a special form of the so-called Bernoulli differential equation 33 , which fortunately can be solved explicitly. The stationary equilibrium (the particular solution) is
N =

K  1
1a ,

(4.1.21)

and the general solution is 34



N (t) =

 1

KN (0)a1 e(a1)t + a1
.
K

(4.1.22)

Equation (4.1.22) describes a monotonic convergence toward the stationary equilibrium level N because the coefcient of the exponential term in the nominator
represents the initial deviations from equilibrium.
A common procedure in many numerical investigations of differential equations consists in replacing the differential operator in (4.1.20) by nite differences.
Substituting Nt+1 Nt for N in (4.1.20) yields
Nt+1

N 2a
,
= (1 + )Nt
K

(4.1.23)

which, by means of the transformation


Nt =

K (1 + )

1
1a

xt ,

(4.1.24)

can be written as



xt+1 = (1 + )xt 1 x1t a .

(4.1.25)

As 0 < a < 1, the transformed difference equation (4.1.25) has qualitatively the
same structure as the logistic equation: it is a one-humped, noninvertible map
xt+1 = f (xt ) dened on the unit interval with f (0) = f (1) = 0 and a critical value
xc located to the left or to the right of xt = 0.5 depending on the parameter a. By
increasing the parameter , the graph of (4.1.25) is stretched upwards. Equation
(4.1.25) therefore exhibits chaos in the Li/Yorke sense for appropriately chosen
33

The general form of a Bernoulli differential equation is

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

In eq. (4.1.20), g (t) and f (t) are constants.

34

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

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

143

parameter values.35 As equation (4.1.24) is only a positive monotonic transformation, chaos can thus prevail in the discrete-time version of the Haavelmo growth
cycle model as well.
The example shows that a standard economic model can exhibit chaotic dynamics without further (and maybe ad hoc) economically motivated modications
of the functional forms when time derivatives are replaced by nite 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 ows), 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 economic

dynamics have been achieved by investigating discrete versions of optimal control
models. It has already been demonstrated in Chapter 3 that it may be theoretically optimal to design a control program with cyclical trajectories. In the context
of a discrete-time, competitive, two-sector model, Benhabib/Nishimura (1985)
provided sufcient 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 uctuations by means of policy measures, it can be shown that an
optimal economic control model may even involve the emergence of chaotic behavior. Surveys of the relevant literature can be found in Boldrin (1991), Boldrin/
Woodford (1990), and Guesnerie/Woodford (1991).
Boldrin/Montrucchio (1986) have demonstrated that arbitrary, discrete-time
dynamical systems can be the outcome of an optimal control program.36 Given a
specic 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 can lead to
chaotic behavior. In the following, a specic numerical example of the presence of
chaotic motion in optimal control will be outlined.
35

The Schwarzian derivative of (4.1.25), namely

a1

(1 a)(2 a)
2
f S (xt ) =

2
ax

a
+
5
a

6

t
2
2 1 (2 a)x1t a
is negative when the last term in parentheses is negative. This is always true when xt is
not too close to 0. Theorems 4.3 and 4.4 can therefore be applied to (4.1.25).
36

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

144

Chapter 4

Consider a standard, two-sector, optimal-growth model with a single capital good

kt and homogeneous labor t available in period t. Capital and labor serve as inputs
in the production of consumption goods ct in sector 1 and in the production of
capital goods in sector 2. Let kt(1) and kt(2) denote the amounts of capital in sectors
1 and 2, respectively, the sum of which must fulll kt(1) + kt(2) kt . Equivalently, (1)
t
(2) (1)
(2)
and t , t + t L, denote the amounts of labor in both sectors with L as the
total labor force.
Let ct = f (1) (kt(1) , (1)
t ) be the production function in the consumption goods
industry. The maximal production in the investment goods industry is, for given
kt(2) and (2)
described by kt+1 = f (2) (kt(2) , (2)
t
t ), i.e., the output is only available
(1)
in the next period. Both functions f and f (2) are assumed to be continuous,
monotonically increasing, and strictly concave.
The optimal control problem can be formulated as follows:

max

(2) (1) (2)

(1)
t ,t ,kt ,kt

s.t.

t u(ct )

t=0

ct f (1) (kt(1) , (1)

t )
kt+1 f (2) (kt(2) , (2)
t )

(4.1.26)

(2)
(1)
t + t L

kt(1) + kt(2) kt
k0 = k

with > 0 as the discount factor and u(ct ) as a standard, strictly concave utility
function.
The optimization problem (4.1.26) is equivalent to the problem
max
kt

t V (kt , kt+1 )

s.t.

(kt , kt+1 ) D

t=0

(4.1.27)

k0 = k,

with D as the admissible set and V as the consumption frontier. The assumptions
concerning f (1) , f (2) , and u imply that
V1 > 0;

V2 < 0;

V11 < 0;

V22 < 0;

2
V11 V22 V12
> 0.

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.

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

145

An optimal control problem like (4.1.26) can be investigated by dynamic programming techniques (cf. Bellman (1957) or Blackwell (1962) for introductions). The value function W (kt ) for a given is dened as
W (k0 ) = max

t V (kt , kt+1 )

s.t. (kt , kt+1 ) D.

(4.1.28)

t=0

The value function W () satises Bellmans equation, i.e.,

!
W (kt ) = max V (kt , kt+1 ) + W (kt+1 ) ,
kt+1

(4.1.29)

which allows the construction of a so-called policy function kt+1 = h (kt ), determining kt+1 as a function of its predecessor kt .
It has been known for a long time37 that the policy function kt+1 = h (kt )
possesses a stable xed point for high values of . Furthermore, for very small
discount rates, h (kt ) = 0 for all admissible kt , i.e., the capital stock is entirely
engaged in the production of consumption goods. However, there exist and
such that for (, ), the map h may exhibit complex dynamics for some V .
As a numerical example consider the following particular form of V (kt , kt+1 )
which was studied by Deneckere/Pelikan (1986):
1
100
V (kt , kt+1 ) = kt kt+1 kt2 kt+1 kt+1 .075kt2+1 +
kt
3
3
7kt2 + 4kt3 2kt4 .

(4.1.30)

Equation (4.1.30) fullls the concavity requirements mentioned above for a given
numerical value of the endowment of labor, L, and the associated maximal production of capital goods.
For the particular choice of = 0.01, the value function W (kt ) of this example
is W (kt ) = 100/3 kt 5kt2 such that Bellmans equation reads
W (kt ) = max V (kt , kt+1 ) + 0.01
kt+1

100
!
kt+1 5kt2+1 .
3

(4.1.31)

Setting the partial derivative of the r.h.s. of (4.1.31) with respect to kt+1 equal to
zero and solving for kt+1 yields the desired policy function38
kt+1 = h(kt ) = 4kt (1 kt ).

(4.1.32)

37

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

38

Substituting (4.1.32) for kt+1 in (4.1.31) veries that W (kt ) = 100/3 kt 5kt2 is indeed
the value function of the problem.

146

Chapter 4

As (4.1.30) is identical with the logistic map (4.1.2) of Section 4.1.1 with = 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.39
As it was mentioned above, the presence of chaotic dynamics in optimal control
models 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 innitely precise 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 periods
capital stock is calculated with a relatively high accuracy depending on the measuring devices, repeated application 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
because 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
reections on the correctness of the planners underlying model because complex
motion seems to be incommensurable with the usual ideas on policy design.

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) belongs to the rst major investigation of
chaotic behavior in economic dynamics. 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), Day (1986)).
Consider the Cobb-Douglas-type utility function
U (x, y ) = xa y 1a ,

a > 0.

(4.1.33)

With the standard budget constraint of the form

px x + py y = M,

(4.1.34)

the demand for x and y is

aM
x =
px
39

and y =

(1 a)M
,
py

(4.1.35)

Replacing the term 100/3 kt in (4.1.30) by 1/(3 ) kt yields more general policy functions
revealing the dependency on the discount rate.

4.1.4. Other Economic Examples

147

respectively. Assume now that a is not a constant anymore but that its value in t
depends on the demands for x and y in the previous period in the following way:
.
at = xt1 yt
1

(4.1.36)

As the utility function (4.1.33) is maximized over xt and yt , i.e., the values in the
current period, the xt1 and yt1 values can be treated as constants in the current
period t. Thus, the r.h.s. of (4.1.36) can be substituted for a in the demand functions
(4.1.35). For example, the demand for x is calculated as:
M px xt1
y M
xt1
M
x
aM
py
t
1
t
1
x =
=
=
px
px
px

xt1 (M px xt1 )M
M
=
=
x (M px xt1 ).
px py
px py t1

(4.1.37)

Equation (4.1.37) describes a one-humped curve like the logistic map (4.1.2). For
px = py = M = 1, (4.1.37) it is identical with (4.1.2). It follows that the pathdependent preferences described by (4.1.33) and (4.1.36) imply the emergence of
chaotic motion for appropriate values of the parameter . Of course, the equation
(4.1.37) has been derived under the assumption of constant prices px and py . When
prices are changing, completely different results can be expected to hold.40
Day/Shafer (1986) considered a standard IS -LM framework and illustrated
the emergence of chaotic dynamics when the investment function possesses a slightly unusual property. This result is particularly important because the IS -LM setup is
traditionally used to motivate governmental activities to intervene in the economy.
When chaos prevails a government may fail to determine the correct degree of
intervention and the precise timing of the activities. Cf. also Grandmont (1989b)
for discussions of Keynesian aspects in nonlinear disequilibrium models.
It seems as if parts of the profession really became aware of the possible relevance
of chaotic dynamics in economics after the publication of Grandmonts (1985,
1986) work on cyclical behavior in a general equilibrium framework. While general equilibrium theory (or competitive equilibrium theory) concentrated for a long
time on the existence and (asymptotic) 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) and
Grandmont (1991). The key to the model is the presence of a backward-bending
offer curve due to a high risk-aversion of the young generation. Even if individuals
have perfect foresight, the economy may, in retrospect, be characterized by complex behavior.41 Woodford (1987, 1989) studied the effects of imperfect nancial
40

An attempt to stabilize the chaotic dynamics generated by (4.1.37) can be found in

Heiner (1989).

41

Concise introductions to complex behavior in overlapping-generations models can be

found in Brock/Dechert (1991) and Kelsey (1988).

148

Chapter 4

intermediation between workers and entrepreneurs in an intertemporal optimization problem. The emergence of cyclic behavior in competitive economies has been
the subject of an increasing number of publications. Surveys of the relevant literature can be found in Boldrin/Woodford (1990) and Guesnerie/Woodford
(1991). This literature also includes the papers mentioned in Section 4.1.3 and, as
far as complex motion is concerned, parts of the literature on sunspot models, cf.,
for example, Azariadis/Guesnerie (1986), Grandmont (1989a), and Woodford
(1990).
Other contributions from various elds include Gaertner (1986, 1987) who
studied cyclical consumption patterns and Ploeg (1986) who investigated complex
dynamics in a nancial-markets model developed by Begg (1983). Chiarella
(1986, 1990), Hommes (1990a), and Jensen/Urban (1984) demonstrated the
emergence of irregular dynamics in the well-known microeconomic cobweb model
of sluggish supply adjustment. One of the very rst examples of chaotic motion in
economic systems was provided by Rand (1979) who considered a simple, gametheoretic Cournot-duopoly model (cf. also Puu (1992)). Chaos has also been shown
to exist in Walrasian tatonnement processes, cf. Bala/Majumdar (1992) and Hahn
(1992). Pohjola (1981) studied a discrete-time version of Goodwins 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,
cf. also Nusse/Hommes (1990) for a discussion of this model. Candela/Gardini
(1986) studied a nonlinear version of a Post-Keynesian growth model and contrasted its analytical properties with empirical ndings. The dynamic effects of
speculative behavior in a market with fundamentalists and chartists were investigated in Chiarella (1992). Models of population dynamics with chaotic motion
can be found in Day/Kim (1987) and Prskawetz/Feichtinger (1992). Samuelson (1990) dwelled on a problem in Bernoulli von Neumann utility theory and
established the existence of chaotic dynamics. Franke/Weghorst (1988) demonstrated the emergence of complex motion in a simple input-output model. Dopfer
(1991) discussed the role of chaotic dynamics in evolutionary economics.
The paper by Day/Walter (1989) represents a unique approach to the possibly chaotic behavior of an economy. Instead of postulating a nonlinear dynamical
system which describes the motion of the economy in the relevant time interval, the
dynamics of an economy over a very long time horizon is comprehended as a succession of multiple dynamical systems, each of which is valid only for a limited time
span. Compare also Day/Pianigiani (1991) for a measure-theoretic discussion of
the model.
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 inuences as political, social, and (of course, most importantly) geographical 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

4.2. Chaos in Higher-Dimensional Discrete-Time Systems

149

example, Dendrinos (1985) delivered a framework for the modelling of irregular

urban decline. Papers by White (1985) and Nijkamp (1987) and the material contained in Nijkamp/Reggiani (1992) uncover that chaotic dynamics may be a typical
phenomenon in models dealing with spatial evolution. Rosser (1991) provided a
survey of these approaches.

4.2. 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 modeled.
However, there are several objections to the use of one-dimensional maps in economic dynamics.
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 simplied.
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.

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-dimensional systems seem to be vague or unpractical. A short overview of existing
tools in the next subsection is followed by a demonstration of complex behavior in
the prototype Kaldor model.

4.2.1. Some Basic Ideas

In the higher-dimensional case it is difcult to nd examples of dynamical systems which can act as prototype systems, i.e., systems which display many important
properties of systems belonging to particular families of dynamical systems. The
following two systems in R2 cannot be called prototype systems but have been studied in greater detail in the literature. Both systems represent interesting examples
because the one-dimensional logistic map can be derived as special cases.
Consider the system
xt+1 = f (xt ) + yt
yt+1 = xt ,

(4.2.1)

150

Chapter 4

with f (xt ) as a noninvertible map.42 When f (xt ) = 1 x2t , the map is known as the
Henon map.43 When = 0, equation (4.1.33) is identical with the one-dimensional
map (4.1.1). When =
 0, (4.1.33) is invertible and can explicitly be solved for xt
and yt , namely xt = yt+1 / and yt = xt+1 f (yt+1 / ). As this map and the map
(4.2.1) are continuous, the map (4.2.1) is a so-called diffeomorphism.44
Although invertible maps dominate the literature on the behavior of two-dimensional discrete-time systems, complex behavior can also be observed in non-invertible maps. For example, Marotto (1978) studied the two-dimensional system
xt+1 = (1 axt byt )(axt + byt )
yt+1 = xt .

(4.2.2)

When b = 0, system (4.2.2) is again qualitatively identical with the logistic equation.
Figures 4.17 and 4.18 show the results of the numerical simulation of (4.2.2) for
particular parameter values. The variation of the parameters yields a large number
of similarly complex and astonishing geometric objects.
The single points (xt , yt ) jump irregularly in these geometric objects, and the
structure becomes apparent only after a larger number of iterations. The objects
form attractors, i.e., initial points located far away from the objects approach them
rapidly. The unusual forms of the attractors which are neither single points nor
closed orbits is the reason why they are called strange attractors.45
An early 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 iterate of a one-to-one function by the iterate of a set, Diamond formulated
conditions for the existence of a scrambled set qualitatively equivalent to the Li/
Yorke conditions. Early applications of Diamonds theorem in economics have
turned out to be problematic and will not be discussed further. Instead, the rest
of this section concentrates on the notion of a snap-back repeller introduced by Marotto (1978). Consider a discrete-time dynamical system
xt+1 = f(xt ),

x Rn

(4.2.3)

with an unstable xed point x = f(x ).

Denition 4.2 (Marotto (1978)): Let Br (x ) denote the closed ball
with radius r in Rn centered at x . The point x Rn is an expanding
42

Cf. Ott (1981), p. 659, for a discussion.

43

The Henon map often serves as the standard example for chaotic dynamics in R2 .
Though the map is almost always cited as an example of a two-dimensional, discrete-time
chaotic system, the identication of its dynamical behavior as chaotic is not undisputed.
Cf. Ott (1981), pp. 660ff., and Benedicks/Carleson (1991).

44

Cf. Devaney (1986), p. 9, for details. A C k map f : X Y , X, Y Rn , is a C k

diffeomorphism if it is invertible and if the inverse map f 1 : Y X is also C k .

45

Cf. Section 5.1 for details on the notion of a strange attractor.

151

4.2. Chaos in Higher-Dimensional Discrete-Time Systems

x
A Simulation of System (4.2.2); a = 0.8, b = 3.0
Figure 4.17

x
A Simulation of System (4.2.2); a = 2.5, b = 2.0
Figure 4.18

152

Chapter 4

xed 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 Br (x ).
This denition 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 xed point is called a snap-back repeller :
Denition 4.3 (Marotto (1978)): Assume that x is an expanding
xed point of f in Br (x ) for some r. Then x is said to be a snap-back
repeller of f if there exists a point x0 Br (x ) with x0 = x , f (k) (x0 ) = x ,
and the determinant of the Jacobian of f (k) (x0 ) is different from zero for
some positive integer k .
Figure 4.19 illustrates this notion of a snap-back repeller: A trajectory which starts
arbitrarily close to the xed point x , i.e., at a point x0 in Figure 4.19, is repelled
from this xed point, but, after having left Br (x ), suddenly jumps back to hit the
xed point exactly. A snap-back repeller is the discrete-time analog of a homoclinic
orbit to be introduced in Section 5.4.

A Snap-Back Repeller
Figure 4.19

Theorem 4.5 (Marotto (1978)):

then (4.2.3) is chaotic.

If f possesses a snap-back repeller,

Marottos denition of chaos is qualitatively identical with the chaos denition of

Li/Yorke for one-dimensional maps.

4.2. Chaos in Higher-Dimensional Discrete-Time Systems

153

4.2.2. An Economic Example

The economic literature actually abounds in examples of the potential emergence

of complex motion in two-dimensional dynamical systems. As a rule of thumb,
complex motion can almost always be observed (for appropriate parameter values) in discrete-time, two-dimensional systems which are derived from originally
continuous-time systems (permitting limit-cycle behavior) by substituting the differential operator by nite differences, i.e., by considering



xt+1 = xt+1 xt = f (xt ) instead of x (t) = f x(t) .
The following example is due to Herrmann (1985) who studied a two-dimensional,
discrete-time business-cycle model with Kaldorian elements:46



Yt+1 = I (Yt , Kt ) + C (Yt ) Yt ,
(4.2.4)
Kt+1 = I (Yt , Kt ) Kt ,
with I (Yt , Kt ) = (Ktd Kt ) + Kt , > 0, as gross investment, and > 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., Ktd = kYt , k > 0, and if the consumption function C (Yt )
has a sigmoid shape similar to Kaldors investment function,47 equations (4.2.4)
become



Yt+1 = (kYt Kt ) + Kt + C (Yt ) Yt ,
(4.2.5)
Kt+1 = (kYt Kt ),
or, abbreviated,
Yt+1 = F1 (Yt , Kt ) + Yt =: G1 (Yt , Kt ),
Kt+1 = F2 (Yt , Kt ) + Kt =: G2 (Yt , Kt ),

(4.2.6)

with



F1 (Yt , Kt ) = (kYt Kt ) + Kt + C (Yt ) Yt ,
F2 (Yt , Kt ) = (kYt Kt ).

(4.2.7)

46

Another example of a slightly different version of the Kaldor model can be found in
Dana/Malgrange (1984).

47

Herrmann (1985) used the following numerical specication of the consumption function:

0.85
2
C (Yt ) = 20.0 + 10.0 arctan
(Yt Y )

20.0
with Y = 22.22 as the equilibrium level of income.

154

Chapter 4

Y
Chaos in a Discrete-Time Kaldor Model; = 25.0, k = 2.0, = 0.1, = 0.05
Figure 4.20

The Jacobian of (4.2.6) is



J=

F11 + 1

F12

F21

F22 + 1

(4.2.8)

with



dC (Yt )
F11 = k +
1 ,
dYt
F12 = ( ),
F21 = k,
F22 = .

(4.2.9)

The eigenvalues of J are

1, 2

F11 + 1 + F22 + 1
=

"

(F11 F22 )2 + F12 F21

.
4

(4.2.10)

It is possible to nd reasonable numerical specications of the parameters such that

the modulus of the eigenvalues is greater than one, implying that the eigenvalues
lie outside the unit circle and that the xed point is an expanding xed point in
Marottos term. As the model is nonlinear, the entries in the Jacobian change for
varying (Yt , Kt ). Eventually, the eigenvalues change so that they lie within the unit
circle.

4.2. Chaos in Higher-Dimensional Discrete-Time Systems

155

Time

Time
Two Time Series With Slightly Different Initial Values
Figure 4.21

For a certain parameter set Herrmann (1985) was able to detect an initial point
in a neighborhood Br of the xed point that leaves the neighborhood during the
rst iterations and jumps to the xed point in the 12th iteration. It follows that
the discrete-time Kaldor model (4.2.6) has a snap-back repeller for the specic parameter set. As Marotto (1978) pointed out, snap-back repellers persist under
small perturbations of the model and variations in the parameter set. However, it
should be recalled that the result of any numerical example cannot be generalized
to hold true for the entire range of parameter values in a certain model. The concept of snap-back repellers requires a separate numerical study for each numerical
specication of a model.
The results of a numerical simulation of (4.2.5) can be found in Figures 4.20
and 4.21. For low values of , the time series converges to the unique xed point.
When is increased, the sequence {(Yt , Kt )}Tt=1 is rst located on an attracting
closed orbit. For values of larger than a critical c , a sequence of 50000 points
in the (Yt Kt ) plane generates the cloud depicted in Figure 4.20. The object in
Figure 4.20 is another example of a strange attractor.
The separate plotting of the time series Yt and Kt versus time shows the irregularity as well as the sensitive dependence on initial conditions more clearly. In
Figure 4.21, the time series of Yt and of Kt are shown for slightly different initial

156

Chapter 4

values. After wandering together for a few periods, the two time series eventually
diverge. This property of the system prevails when higher t-values are considered,
i.e., the phenomenon is not restricted to the transient phase.
K

Y
The Basin Boundary of the Attractor of (4.2.5); = 25.0
Figure 4.22

The basin of attraction of the attractor is plotted in Figure 4.22. White areas
represent initial points that converge toward the attractor. The grey-shaded areas
represent initial points that converge toward innity. In contrast to the case of regular attractors where the basin of attraction is usually a connected and relatively wide
set, the basin of attraction in Figure 4.22 is a complicated, disconnected set. Occasionally, the basin boundary comes very close to the attractor itself. However, no
evidence of a fractal nature of the basin boundary could be found in this numerical
experiment.

Other examples of chaotic motion in two-dimensional, economic systems can be

found in Hommes (1992), Hommes/Nusse/Simonovits (1990), and Simonovits
(1992). The authors studied the effects of Hicksian ceilings and oors (cf. Hicks
(1950)) in the investment behavior in capitalist and socialist economies. The
role of corporate debt and investment condence was studied in Delli Gatti/
Gallegati/Gardini (1991). A discussion of a nancial-crises model can be found
in Gardini (1991) together with a lot of information on the bifurcation behavior
in two-dimensional endomorphisms. Gaertner/Jungeilges (1988) investigated

4.3. Complex Transients in Discrete-Time Dynamical Systems

157

the possibly complicated behavior in a model describing the consumption decision of two households, both of which are inuenced by the consumption decision
of the other household. Piecewise linear, non-Walrasian macroeconomic models

were studied by Simonovits (1982) and Hommes/Nusse (1989). Bohm

(1993)
discussed the emergence of regular periodic motion and chaotic behavior in a
micro-macro model with overlapping generations and rationing. Marottos procedure in detecting a strange attractor has also been applied to a growth cycle
model in the Keynes-Kalecki tradition by Jarsulic (1991). A high-dimensional
discrete-time system emerging in the study of an inventory management problem (the beer game, cf. Mosekilde/Larsen (1989)) was studied in Thomsen/
Mosekilde/Sterman (1992). Another high-dimensional system was investigated
by Silverberg/Lehnert (1992, 1993) who considered a Schumpeterian model of
embodied technical change.

4.3. Complex Transients in Discrete-Time Dynamical Systems

The examples of chaotic dynamics presented in the previous sections concentrated
on the motion on chaotic attractors. However, complex behavior cannot only occur
on such attractors but can also be a property of the motion in the transient phase
before an attractor has been reached. A transient trajectory can display complex
behavior even if the attractor is non-chaotic.
Complex transient motion in nonlinear dynamical systems may be a particularly
interesting property for economics. There seems to be no doubt that nothing like
an eternal law of economic motion exists. Even if one believes that aspects of the
motion of an actual economy can be approximated with the help of a deterministic
system, one can hardly deny the eventual invalidity of a given system. The presence
of innovations and structural change can imply changes in the parameters of a
given system, functional forms may vary, or the dimension of a system may change
in the course of the emergence of new products and sectors. When the behavior
of the actual economy is modeled with a deterministic system, it may therefore
happen that the actual economy has already changed (and the deterministic model
has consequently become invalid) before a trajectory of the investigated model has
reached an attractor. Thus, it cannot be excluded that the motion on an attractor
never depicts the motion of the actual economy although the dynamical system
represented a correct picture of reality in the initial phase. When a dynamical
systems generates complex transient motion it is possible to encounter irregular
behavior during the time span the considered system is indeed valid. The fact that
complex transient motion can emerge in systems with a regular attractor like a
stable xed point or an attracting closed orbit lets this type of motion appear even
more interesting.
The following two sections attempt to illustrate the emergence of such complex
transient trajectories in one- and two-dimensional maps. The basic phenomenon
underlying the complex transient behavior is the existence of Cantor sets. In the
following examples, these sets act as repellers. Trajectories starting at initial points
close to such a set can nevertheless stay in a neighborhood of the set for a rather

158

Chapter 4

long time and can display chaotic behavior. The emergence of a Cantor set will be
demonstrated with the horseshoe map investigated by Smale (1963).48

4.3.1. Complex Transient Behavior in One-Dimensional Systems

The one-dimensional examples of chaotic motion in Section 4.1 all assumed the
presence of a unimodal map with a graph similar to that of the logistic equation
(cf. Figure 4.2). It has always been assumed in these examples that the appropriate
maps have at most one nontrivial xed point (in addition to the origin). In the
following this uniqueness property of the xed point will be abandoned, and the
case of maps with multiple xed points will be considered instead.
Assume that the graph of a one-dimensional map has a shape like the one in
Figure 4.23.49 The map still has a single
critical point xc like logistic maps and
represents an endomorphism. However, there exist two additional inection points which are responsible for
the existence of the two additional xed
points A and B . The map has been
drawn in such a way that the xed point
C is unstable, i.e., the slope of the graph
at C is absolutely larger than 1. The
xed point A is obviously stable while
the xed point B is unstable. Trajectories starting at initial points to the left
Figure 4.23
of A converge toward A in a monotonic
fashion. The same is true for trajectories starting in the interval between the xed points A and B and in the interval
1
1
(x
B , xM ). The intervals (0, xB ) and (xB , xM ) represent the immediate basin of
attraction for A. However, almost all remaining initial points in the interval (0, xM )
are also attracted by A. The critical point xc is mapped to the point xc2 in the immediate basin of attraction within two iterations. Other initial points in the interval
1
(xB , x
B ) may require a longer time before they are eventually mapped into the
interval (0, xB ). The motion of these initial points can be extremely complicated.
1
In fact, the interval (xB , x
B ) contains a strange repeller in the form of a Cantor set
.50 Initial points located in this set will stay there forever. Initial points located in
48

49
50

Details on the mathematical aspects of complicated transient motion can be found,

e.g., in Grebogi/Ott/Yorke (1987a,b,c), Kantz/Grassberger (1985), McDonald/
Grebogi/Ott/Yorke (1985a,b), or Nusse/Yorke (1989).
Compare Mira (1987) for an intensive discussion of this map.
Cantor sets will be described in greater detail in Section 4.3.2 (in the form of the invariant set in the horseshoe map) and in Section 6.2.2 (in the form of the Cantor middlethird set).

4.3. Complex Transients in Discrete-Time Dynamical Systems

159

a neighborhood of the set can initiate the onset of a wild transient motion before
the trajectory eventually leaves the neighborhood of the set and the initial point is
nally mapped to the interval (0, xB ). Summarizing, the basin of attraction of the
xed point A consists of the set B(A) = (0, xM )\.
As an economic example, consider a Walrasian tatonnement in a single market
(cf. Walras (1954)). The standard textbook literature presents supply and demand functions as monotonically increasing and decreasing functions of the goods
price, respectively. It has already been mentioned in Section 2.2.3 that a monotonicity in individual excess demand functions does not necessarily imply the same
monotonicity in the aggregate supply and demand functions. It is surprising that
non-monotonic supply functions can not only be found in the literature emerging
in the 1970s of this century but that Walras (1954) himself provided a hint for
possibly complicated motion.
Walrass original picture for the description of the supply-demand scenario
in a single market is depicted in Figure 4.24. The downward bended supply
curve (in a Marshallian coordinate system) reects a possible inferiority but it
can also be considered the consequence
of an aggregation procedure. The scenario depicted in Figure 4.24 was investigated by Day/Pianigiani (1991). The
authors demonstrated the presence of a
chaotic attractor and the occurrence of
complex motion in the properly specied price dynamics. However, with a
Walras Tatonnement Example
slight modication, it can be shown that
Figure 4.24
this example also implies the potential
emergence of complex transient motion even if the system possesses a regular
xed-point attractor.
Assume for that reason the supply and demand constellation depicted in Figure
4.25. While the monotonicity properties of both functions are the same as those
in Figure 4.24, the bubbles in the functions for high values of p imply multiple
xed points. The excess demand z (p) for varying prices is depicted in the lower
diagram of Figure 4.25 with the four zero roots A, B , C , and D. Assume a standard
tatonnement process, i.e., prices are changed when a non-zero excess demand, z (p),
is observed in the market:51



pt+1 = pt+1 pt = z (pt ) .
(4.3.1)
For simplicity, it will be assumed in the following that the function () is linear, i.e.,
pt+1 = z (pt ),
51

> 0.

Cf. Section 2.2.3 for another tatonnement process.

(4.3.2)

160

Chapter 4

The Demand and Supply Function in Walras Example with Additional Slight
Nonlinearities (Upper Part) and the Excess Demand Function (Lower Part)
Figure 4.25

The map (4.3.2) is shown in Figure 4.26. It possesses the four xed points A, B , C ,
and D. Obviously, C represents a stable xed point while the remaining points A,
B , and D are unstable.
Although the graph of (4.3.2) in Figure 4.26 has a mirror-imaged shape as compared with Figure 4.23, it generates the same dynamic behavior. The intervals
1 1
(pB , pD ) and (p
D , pB ) represent the immediate basin of attraction of the xed
1
point C . A Cantor set exists in the interval (p
B , pB ), implying that the motion
starting at initial points in this set or in its neighborhood is complicated. As the
1
critical point pc is mapped out of the interval (p
B , pB ), this complex motion is
observable only within a (possibly considerably long) limited time span.52
52

Other economic examples implying maps like the one in Figure 4.23 can be found with
relative ease. For example, a variation of Days (1982) growth-cycle model can be found

4.3. Complex Transients in Discrete-Time Dynamical Systems

161

The Graph of the Map (4.3.2)

Figure 4.26

4.3.2. Horseshoes, Homoclinic Orbits, and Complicated Invariant Sets

This section deals with complex transient behavior in two-dimensional, discretetime systems. The so-called horseshoe map introduced by Smale (1963, 1967) will be
described at some length because the construction of the invariant set in this map
is enlightening for the geometry of chaotic dynamical systems.53
A consideration of the horseshoe map is not only interesting for a description of
complex transient motion. Some statistical tools for a description of chaotic motion
(like Lyapunov exponents, cf. Chapter 6) rely on the stretching and contracting of
sets of initial points which can most clearly be illustrated with the horseshoe map. In
addition, Poincare maps of continuous-time dynamical systems occasionally possess
invariant sets similar to the invariant set in the horseshoe map (cf. the discussion of
the Shilnikov scenario in Chapter 5).
in Lorenz (1992b). However, it should be emphasized that even more so-called ad-hoc
assumptions may be necessary in order to generate the inexion points.
53

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.

162

Chapter 4

The horseshoe map constitutes a two-dimensional, discrete-time dynamical system representing a C k diffeomorphism. Instead of providing a set of difference
equations, the map will be described verbally. Consider the set of initial points
located in the unit square S = [0, 1] [0, 1] in Figure 4.27.a. Under the action
of a map G these initial points are transformed into a new geometric object representing the location of the initial points after one iteration. The transformation is
executed in a two-step procedure (cf. Figure 4.27.b):
The square is horizontally contracted (compressed) by a factor , and is vertically
stretched by a factor .
The rectangle [0, ] [0, ] generated by this contraction and stretching is
folded such that the form of a horseshoe emerges.

Depending on the factors and two cases can be distinguished: 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
horseshoes legs are not mapped to the area covered by the square S . 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.

4.27.a

4.27.b
The Construction of a Horseshoe
Figure 4.27

4.27.c

In a second iteration the square in Figure 4.27.b with the two shaded vertical
strips is contracted and stretched to the rectangle in Figure 4.27.c. Folding the

4.3. Complex Transients in Discrete-Time Dynamical Systems

163

rectangle yields the intersection with the square S shown in the right-most picture
in 4.27.c. The two shaded vertical strips in Figure 4.27.b are transformed to 4 vertical
strips in Figure 4.27.c. Again, parts of the two strips in 4.27.b ultimately leave the
square S . Successive iterations, Gn (S ), generate innitely many bended strips for
n . The set of points constituting the vertical strips that overlap with S is given
by Gn (S ) S .

G1 S G(S )

G1 (S ) S

Figure 4.28

The two vertical strips in 4.27.b are generated by mapping only a part of the
original square S to itself. Working backwards from 4.27.b to the original square
shows that the vertical strips correspond to two
horizontal strips in S (cf. Figure
4.28), i.e., the horizontal strips are given by G1 S 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 4.27.c are generated
by mapping points in 4 horizontal strips in the pre-image to S (cf. Figure 4.29).

G2 S G2 (S )

G2 (S ) S

Figure 4.29

After
n iterations
the set of points representing the horizontal strips is given by



n
SG (S ) = SGn (S ). In order to locate those points in S that will stay in S
G
forever and those that originated in S in the past, the intersection of the horizontal
and vertical strips must be considered. Figure 4.30 depicts this intersection for two
n

164

Chapter 4

The Invariant Set in the Horseshoe Map

Figure 4.30

forward and backward iterations. For n , the rectangles in Figure 4.30 shrink
to points. The emerging set of points is an example of a so-called Cantor set.54
Formally, the set of points in Figure 4.30 for n is given by
I=

#

n=0

 # #


Gn (S )
Gn (S ) .
n=0

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 .
Starting at an arbitrary point in the invariant set I , successive iterations of G can
carry the initial point eventually 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 55 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 .
54

Compare also Section 6.2.2. and Figure 6.5 for the construction of a Cantor set. Figures
4.27.b and 4.27.c contain horizontal distance lines that correspond to the rst lines in
Figure 6.5.

55

Symbolic dynamics describe the evolution of a point from n = to n = by a

sequence of symbols like 0 and 1. For example, the symbol 0 may be assigned to points
in the lower half of Figure 4.30 and the symbol 1 to points in the upper half. A sequence
. . . 1001 . . . then means that a point in the upper half is mapped to the lower half in
the rst two iterations and returns to the upper half after the third iteration. For the
horseshoe map there exists such a sequence with positions from to for every
point in I , and, vice versa, for every sequence there is exactly one point in I .

4.3. Complex Transients in Discrete-Time Dynamical Systems

165

The corresponding motion in the original ow is then characterized by the presence

of motion on tori and of irregularly wandering trajectories.
As was mentioned above, Smales original horseshoe map does not possess an
attracting invariant set. Almost all 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 nally leaves the square.
Most importantly, it can be shown that the specic features of the invariant set of
the horseshoe map arise when so-called transversal homoclinic orbits exist in the map.
Consider a saddle-type xed point x with stable and unstable manifolds W s (x )
and W u (x ), respectively. If the stable and 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 innitely many other homoclinic
points: p lies on W s (x ), implying that all iterates of p lie on W s (x ) as well. But
p and its iterates also lie on W u (x ). Thus, every iterate of p lies both on W s (x )
and W u (x ), i.e., every iterate of p is a homoclinic point.

A Transversal Homoclinic Orbit for a Map in R2

Figure 4.31

When the xed 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 s (x ). Equivalently, W s (x ) winds wildly
around the unstable manifold when x is approached on the backward orbit (cf.
Figure 4.31).
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 SmaleBirkhoff homoclinic theorem56 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.
56

Cf. Smale (1967), p. 29.

166

Chapter 4

Time
The Transient Motion in the Kaldorian Model (4.2.5); = 21.0
Figure 4.32

It is difcult to locate homoclinic orbits in specic dynamical systems. The

horseshoe map is nevertheless important, because it uncovers that a possibly complex transient motion cannot be excluded per se in discrete-time, two-dimensional
systems. Figure 4.32 shows the result of a numerical simulation of the Kaldor-type
model described in Section 4.2.2. The time series has been obtained from the same
parameter set, but the adjustment coefcient is lower than before ( = 21.0).
The attractor of the system for this parameter set is a regular period-80 attractor.
For a relatively long time span the transient motion is remarkably complex. When
the largest Lyapunov exponent (cf. Section 6.2.4) is calculated for the rst 350 periods it turns out that it is positive. Thus, the transient time series behaves like
a chaotic time series although the trajectory eventually settles down on a regular
attractor (with a negative largest exponent).

Chapter 5

Chaotic Dynamics in Continuous-Time

Economic Models

ost existing economic models dealing with the chaos property are discretetime models and can be reduced to a one-dimensional dynamical system.
The main reason for this concentration on one-dimensional systems can probably
be found in the relative ease with which chaotic motion can be established in these
systems and because the two-dimensional case is already much more difcult to
handle. However, chaos does not occur only in discrete-time models, but may be a
property of continuous-time models as well.

5.1. Basic Ideas

In the one-dimensional, discrete-time case, chaos according to the Li/Yorke denition 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 dened. Equivalently, in higher-dimensional, discrete-time systems the sequence of points can jump irregularly in the space of the variables. As the
time step underlying the motion of the state variables in differential equations is innitely small, the evolution is smooth and the jumps typical for discrete-time systems
usually do not occur.1 While chaotic motion in discrete-time systems is described by
1

Compare, however, Section 2.5 and Chapter 7 dealing with relaxation oscillations and
catastrophe-theoretic models, respectively, for approaches that attempt to illustrate the possibility of discontinuous jumps in continuous-time systems.

168

Chapter 5

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 system, named after the meteorologist E.N. Lorenz who investigated the
three-dimensional, continuous-time system
x = s(x + y ),
y = rx y xz,
z = bz + xy,

s, r, b > 0,

(5.1.1)

emerging in the study of turbulences in uids. For r above the critical value r =28.0,
the trajectories of (5.1.1) evolve in a rather unexpected way. Suppose a trajectory
starts at an initial value in the center of the left wing in Figure 5.1. For some time
the trajectory regularly spirals toward the outer region of that wing. However, the
trajectory eventually leaves the left wing, wanders to the center of the right wing,
and starts spiraling outwards again. When the trajectory has reached a region far

The Lorenz Attractor; s = 10, r = 28, b = 2.66

Figure 5.1

enough away from the center, it again wanders toward the 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 rst 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 densely be lled by the trajectory.
Note however, that the two wings do not exist isolated from the motion itself.
While regular objects like xed points or limit cycles are dened independent of

5.1. Basic Ideas

169

the specic trajectories which converge toward these objects from different initial
points, the precise location of the trajectory in Figure 5.1 depends on the chosen
initial point. It is the evolution of the system that generates the geometric shape
shown in the gure.2 Different initial points therefore imply different trajectories
but the shape of the object in Figure 5.1 remains unchanged. As trajectories starting
at different initial values in a neighborhood of the object all converge to and remain
in the 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 (including complicated closed curves).
The notion of a strange attractor was introduced by Ruelle/Takens in 1971.
The geometric shape of Figure 5.1 is astonishing because the nonlinearities in
(5.1.1) are relatively weak as compared with other quadratic or higher-order rst
derivatives. A strange attractor with even weaker nonlinearities is the Rossler attractor
shown in Figure 5.2, the underlying differential equation system of which is
x = (y + z ),
y = x + ay,
z = b + z (x c),

a, b, c > 0.

(5.1.2)

The Rossler Attractor; a = 0.2, b = 0.2, c = 5.7

Figure 5.2

While there is no common agreement on the strangeness of a strange attractor,

the following denition summarizes the verbal description given above:
2

The notion of the trajectorys wandering on a wing is therefore only used for illustrative
purposes.

170

Chapter 5

Denition 5.1 (Ruelle (1979)): Consider the n-dimensional dynamical system

x = f(x, ),

x Rn ,

(5.1.3)

with as a parameter. A bounded set A Rn is a strange attractor for

(5.1.3) if there is a set U with the following properties:
i) U is an n-dimensional neighborhood of A.
ii) A is an attracting set in the sense of Denition 2.1.
iii) There is a sensitive dependence on initial conditions when x(0) is
in U, i.e., small variations in the initial value x(0) 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.
In the following, chaos in continuous-time dynamical systems will be identied with
the existence of a strange attractor:3
Denition 5.2: A dynamical system (5.1.3) is chaotic if it possesses a
strange attractor in the sense of Denition 5.1.
When a continuous-time dynamical system possesses a strange attractor and generates chaotic motion it has to be kept in mind, however, that for a sufciently 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-dimensional systems like the logistic equation, the equivalent phenomenon in continuous
time can emerge only in at least three-dimensional systems. Canonically, chaos cannot occur in two-dimensional, continuous-time systems because a trajectory cannot
intersect itself. The most complex type of motion that can arise in two-dimensional
systems is a motion in a closed orbit, a homoclinic orbit, or the convergence of the
trajectory toward these limit sets.
A very useful concept in descriptions of the dynamic behavior of continuoustime dynamical systems are so-called Poincare sections and maps. These maps can
also be used for an illustration why chaotic motion cannot occur in two-dimensional
systems.
Consider rst the trajectory of a planar continuous-time system and suppose that
the system converges toward a closed orbit as shown in Figure 5.3.a. Draw a straight
line, , through the trajectory and mark the points of intersection of the line with
the trajectory every time the trajectory crosses the line in the same direction. The
set of all marked points is called the Poincare section. Denoting the rst point of
3

The expressions strange attractor and chaotic attractor are thus treated synonymously. Compare, however, Grebogi/Pelikan/Ott/Yorke (1984) for examples where a
distinction of the two concepts is appropriate.

5.1. Basic Ideas

171

intersection as y1 , the next as y2 , etc., a sequence of points {yi } is constructed

depending on the motion in the differential equation system: given a certain yi , the
point yi+1 is determined as well, provided the solution of the differential equation
is known. As the points yi R2 are all located on the (one-dimensional) line ,
they can be described by points Yi R. The sequence {yi }m
i=1 can therefore be
described by a 1D map P : R R, which maps Yi to Yi+1 according to the motion
in the vector eld. The map P is the Poincare map of the continuous-time dynamical
system.

5.3.a: n = 2
5.3.b: n = 3
Poincare Sections of a Continuous-Time Dynamical System
Figure 5.3

The interesting property of this Poincare map consists in the fact that the map
provides complete information on the qualitative behavior of the original differential equation though the map has a dimension of only n 1. In Figure 5.3.a, the
convergence toward a limit cycle in the differential equation system is represented
by a converging sequence of points toward a xed point in the Poincare map. Equivalently, if the trajectory 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 planar dynamical system can only have Poincare maps exhibiting stationary xed points or monotonically increasing or decreasing sequences of points
{Yi }. 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 5.4.
The dynamic behavior of this map can be analyzed with the help of the method employed in Chapter 4, i.e., the 450 line can be used to demonstrate the evolution of
Yi . As the graph in Figure 5.4 is (necessarily monotonically) increasing with a slope
less than 1 at the xed point, the sequence {Yi } converges toward this xed point
regardless of the initial value of Y . According to the principles in constructing the
map, the differential equation system is therefore characterized by convergence toward a stable limit cycle. Alternatively, a diverging sequence in the Poincare map
corresponds to an unstable cycle.

172

Chapter 5

The Dynamic Behavior in a One-Dimensional Poincare Map

Figure 5.4

y
30
20
10

C
-30

-20

-10


10

20

30

-10
-20
-30

The Two-Dimensional Poincare Map of the Lorenz Attractor,

z = constant. Source: Berge et al. (1986), p. 126 (Re-drawn from the Original).
Figure 5.5

Consider next a three-dimensional system whose trajectory forms the spiraling

curve in Figure 5.3.b. The Poincare section is generated by laying a two-dimensional
plane through the trajectory. The sequence of the three-dimensional points of
intersection generates a two-dimensional mapping in a way similar to the above
mentioned procedure. For the case of the Lorenz attractor, this two-dimensional
Poincare map is illustrated in Figure 5.5. The map seems to consist of two separate
segments, each corresponding to a separate spiraling motion around one of the two
(unstable) xed 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 indicates the presence of complex behavior in the three-dimensional Lorenz
system. The rst return map is dened as the sequence {xji }m
i=1 of a single variable
j
x , j = 1, 2, 3 on a Poincare section.

5.1. Basic Ideas

173

zimax
+1

zimax
A First Return Map of the Lorenz Attractor; z = 0
Figure 5.6

It is useful to study the rst 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 rst return map for the variable z of the Lorenz equations is
shown in Figure 5.6. The Poincare section was created by the surface with z = 0. As
z changes its direction on this surface, the map shown in Figure 5.6 thus describes
the successive extremal values (the maximal values actually) of the coordinate z in
the attractor: let zi be the maximum value of z the rst time the attractor performs
a cyclical round, then zi+1 will be the maximal z value in the next round.
The rst return map in Figure 5.6 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 ctitious curve on which the observed pairs (zi , zi+1 ) are located is
absolutely larger than one at the point of intersection with the 450 line, indicating
possibly complex behavior. As all realized points of the rst return map nearly form
a continuous curve, it is likely that chaos is present in this map. When chaos prevails
in this rst return map, then the behavior of the original ow is also characterized
by irregular motion, i.e., the orbits in the ow erratically change their diameter in
the z direction.
It should be noted, however, that chaos in continuous-time dynamical systems
cannot be established via general and simultaneously simple characteristics of these
systems like, e.g., the Li/Yorke criterion in one-dimensional, discrete-time equations. During the last decades, a variety of higher-dimensional systems belonging to
different families has been investigated proving the presence of a strange attractor,4
but it is not always clear whether the diverse examples possess common (possibly
4

A summary of known chaotic dynamical systems can be found in Garrido/Simo (1983).

174

Chapter 5

hidden) structural properties. 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 oscillator systems
and forced oscillators. The last section deals with the Shilnikov scenario and the
presence of horseshoes in the Poincare maps of the underlying continuous-time
system. A modied version of Metzlers business-cycle model with inventories is
presented as an economic example of spiral-type attractors.

5.2. The Coupling of Oscillators

Nonlinear oscillators have already been discussed in Chapter 2. The economic
relevance of these oscillators was illustrated with examples from macroeconomics
or price and quantity adjustments in a single market. A common property of these
examples can be found in the implicit assumption that the motion of the relevant
variables does not depend on exogenous inuences in an essential way. It is, of
course, possible to study the effects of varying parameters but the inuence of
permanently changing exogenous variables (i.e., variables which do not belong to
the considered system) has not been taken into account yet. These inuences
can be investigated by modelling the remaining, previously exogenous parts of the
economy in an explicit manner and by emphasizing the links between the different
parts. Alternatively, a general system in which all possible variables are treated
simultaneously can be split into sub-systems linked together by coupling terms.
A dynamical system can thus be understood as a set of sub-systems. The partialanalytic view dominating the examples in the previous sections results when no
dynamic coupling of the sub-systems takes place. Interdependencies between the
sub-systems are then interpreted as coupling effects. A system of coupled oscillators
emerges when the sub-systems generate endogenous uctuations in the absence of
coupling effects.

5.2.1. Toroidal Motion

Consider a set of two independent, two-dimensional, nonlinear oscillators, i.e., dynamical systems generating endogenous uctuations:
x = f 1 (x),
y = f (y),
2

x, y R2 ,

(5.2.1)

and let both oscillators represent dissipative systems.5

In (5.2.1) the motion in each of the two oscillators depends entirely on the value
of the variables xi , i = 1, 2, and yi , i = 1, 2, respectively, in the isolated oscillators.
5

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.

5.2. The Coupling of Oscillators

175

The limit cycles generated by these oscillators are one-dimensional geometric objects in the plane. Assume that these limit cycles are equivalent to the unit circle
S1 , i.e., a circle with radius r = 1.
Although both oscillators are independent it is useful to consider the joint motion of the variables.6 This motion of the four variables (x1 , x2 ) and (y1 , y2 ) in
(5.2.1) takes place on an object which is the product of the two limit cycles, namely
S1 S1 . 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. As (for obvious reasons) it is difcult to present objects in four-dimensional space, Figure 5.7.a depicts
a two-dimensional torus with different radii of the motion in three-dimensional
space. Figure 5.7.b illustrates the two basic directions of the motion. The gure
demonstrates that a horizontal and a vertical cyclical component are involved in
the motion on the torus. The torus in Figure 5.7.a is a two-dimensional object because it can be constructed from a two-dimensional plane by appropriate bending
and gluing.

5.7.a: The Motion on the Surface

5.7.b: The Directions of the Motion
A Two-Dimensional Torus with its Cyclical Components
Figure 5.7

A trajectory on a torus may form simple closed curves as well as rather complicated ones. Assume a system like (5.2.1) and consider an initial point located on the
surface of a two-dimensional torus. Denote the frequencies involved in the motion
of each of the two independent oscillators as i , i = 1, 2. The following types of
oscillatory motion on the torus can be distinguished:
Both separate motions describe a closed curve within the same time interval,
i.e., when the two cycles are completed the system has reached the initial point
again. The frequencies 1 and 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 1 /2 = 2. In that
6

It may be argued that the geometric complexity is 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.

176

Chapter 5

case the rst oscillator generates two complete cycles while a single closed orbit
is described in the second oscillator. The system passes the initial point on the
torus after two complete cycles of the rst oscillator.
Again, one of the oscillators generates a faster motion, but the ratio of the involved frequencies is irrational, e.g., 1 /2 = . 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 covered by the trajectory. The motion is then said to be
quasi-periodic.

5.8.a.: Rational Frequency Ratio

5.8.b.: Irrational Frequency Ratio
Trajectories on a Two-Dimensional Torus (Projections)
Figure 5.8

Figures 5.8.a and 5.8.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. 5.8.a) and irrational (cf. 5.8.b). The gures contain planar
representations of a two-dimensional torus. The torus is constructed from the plane
by rolling the planar sheet and gluing together the upper and lower edges. The left
and right edges of the resulting tube are then connected in a similar way. According to this construction, 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 5.8.b never lies
on a closed curve.7

Cf. Haken (1983b), pp. 28f., for details. Note that the planes in Figure 5.7 are stylized
pictures. The statement is true (for the gure) when the trajectory starting at the origin
does not return to this point.

5.2. The Coupling of Oscillators

177

A numerically precise two-dimensional torus is shown in Figures 5.9.a and 5.9.b.8

Figure 5.9.a shows the trajectory after 5000 Iterations. When a longer time horizon with 20000 iterations is considered the torus will more densely be covered by
the trajectory (cf. Figure 5.9.b). In spite of its complexity the trajectory on the
torus behaves regularly in the sense that there is no sensitive dependence on initial
conditions.

A Quasiperiodic Motion on a Two-Dimensional Torus; 5000 Iterations; t = 0.1

Figure 5.9.a

A Quasiperiodic Motion on a Two-Dimensional Torus; 20000 Iterations; t = 0.1

Figure 5.9.b
8

The underlying three-dimensional system consists of the differential equations




x = (a b)x cy + x z + d(1.0 z 2 )
y = cx + (a b)y + y z + d(1.0 z 2 )
z = az (x2 + y 2 + z 2 ).

The parameter values are a = 2.105, b = 3.0, c = 0.25, and d = 0.2. Cf. Langford
(1985) for details on this dynamical system. The time step in the numerical simulation
is 0.1 time units. For the present system this relatively large value is not problematic
(the motion is very slow) but necessary in order to generate a sufciently long time
series.

178

Chapter 5

Suppose now that the motion of the variables in both oscillators depends also
on the motion in the other oscillator, i.e.,
x = f 1 (x, y),
y = f (x, y),
2

x, y R2 ,

(5.2.2)

or, in other words, that the two two-dimensional oscillators are coupled. The general
case of m coupled, -dimensional oscillators can be written as
x 1 = f 1 (x1 , x2 , . . . , xh , . . . , xm , ),
..
.
x h = f h (x1 , x2 , . . . , xh , . . . , xm , ),
..
.

xh R ,

R,

(5.2.3)

x m = f m (x1 , x2 , . . . , xh , . . . , xm , ),
with as a parameter.9 Assume that (5.2.3) possesses complex conjugate eigenvalues and that for low values of the parameter the attractor of the system is a xed
point. By increasing the parameter, a Hopf bifurcation10 may occur, i.e., a pair
of complex conjugate eigenvalues becomes purely imaginary and a closed orbit
emerges in a neighborhood of the xed point.
A further increase in the parameter may generate a second Hopf bifurcation.
In that case the former limit cycle bifurcates into a two-dimensional torus. Analytically, this second bifurcation can be determined only in special cases: the rst Hopf
bifurcation makes use of the Jacobian evaluated at the xed point, i.e., the entries
of the matrix are constants. However, in the case of a limit cycle, the entries of
the Jacobian have to be evaluated along the cycle, i.e., the Jacobian becomes timedependent. It must therefore be assured that another pair of eigenvalues becomes
purely imaginary independent of the location of the system on the cycle. For the
sake of simplicity, assume that such a second Hopf bifurcation indeed takes place.

=
T1
=
T2
=
T3

(1st Hopf)
(2nd Hopf)
(3rd Hopf)

Fixed Point

=
Tn

(nth Hopf)

The Landau Scenario for the Onset of Turbulences

Table 5.1
9
10

Equation (5.2.2) is then the special case of (5.2.3) with  = 2 and m = 2.

Cf. Section 3.2.2.

5.2. The Coupling of Oscillators

179

Provided that the dimension of the dynamical system is large enough, further
bifurcations may lead to the emergence of a three-dimensional torus, T3 , a fourdimensional torus, T4 , 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 modeled,
more variables (degrees of freedom) must be included in the analysis so that more
bifurcations can occur. In the limit, a system with an innite number of variables
undergoing a large number of bifurcations resembles a random process which is
considered to be the appropriate description of turbulence. Table 5.1 schematically
describes this so-called Landau scenario for the onset of turbulence.
A major drawback of this scenario is the fact that even after a large number of
bifurcations the motion is not sensitive to initial conditions. Initial points which
are close together will stay close together as time elapses. This regularity aspect
obviously contradicts the intuitive notion of turbulence.11
Another possibility for the onset of turbulence was proposed by Ruelle/Takens
in 1971. Instead of a very large number of bifurcations as a prerequisite for the onset
of turbulent behavior, the Ruelle/Takens scenario implies that already after three
Hopf bifurcations the motion can become chaotic.
Theorem 5.1 (Newhouse/Ruelle/Takens(1978)):
Let x = (x1 , . . . , xm ) be a constant vector eld on the torus Tm .
If m = 3, in every C 2 neighborhood of x there exists an open vector
eld with a strange attractor.
If m 4, in every C neighborhood of x there exists an open vector
eld with a strange attractor.
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
Hopf bifurcations) then there may exist a strange attractor in the neighborhood of
=
T1
=
T2
=
Chaos

(1st Hopf)
(2nd Hopf)
(3rd Hopf)

Fixed Point

The Ruelle/Takens Scenario

Table 5.2
11

In fact, the Landau scenario could not be observed experimentally in the natural 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 6.1). However, only a few dominant frequencies together with linear
combinations could be observed in, e.g., uid dynamics laboratory experiments. Cf.
Berge et al. (1986), pp. 165ff., for details.

180

Chapter 5

the torus. If the system is slightly perturbed, it may not move on the torus anymore,
but initial points may instead be attracted by a strange attractor, i.e., the motion
becomes chaotic. This Ruelle/Takens scenario is schematically described in Table
5.2.

5.2.2. International Trade as the Coupling of Oscillators

Consider the following simple dynamic IS - LM model as the starting point for an
example of a coupled oscillator system.12 Let Y denote income, r is the interest
rate, and M describes the (constant) nominal money supply. Assume that the price
level, p, is xed during the relevant time interval. Suppose that gross investment, I ,
depends on income in the sigmoid Kaldorian fashion and on the interest rate, i.e.,
I = I (Y, r),

IY > 0,

Ir < 0.

Savings depends on income and the interest rate:

S = S (Y, r),

0 < SY 1,

Sr > 0.

Income adjusts when a positive or negative excess demand prevails in the goods
market, i.e.,
Y = (I S ),

> 0.

(5.2.4)

The liquidity preference, L(Y, r), depends on Y and r in the usual way, i.e.,
LY > 0, Lr < 0. Assume that the interest rate adjusts according to
r = (L(Y, r) M/p),

> 0.

(5.2.5)

Let (Y , r ) be the unique xed point of the system and assume that it is unstable.
Assume further that equations (5.2.4) and (5.2.5) constitute a nonlinear oscillator
such that the model generates endogenous uctuations.13
12

The following example is adopted from Lorenz (1987a) and relies on a model originally studied by Torre (1977) in the context of bifurcation theory. Another economic
example of coupled oscillator systems in the context of international trade can be found
in Puu (1987). Note that the adjustment equation for the interest rate is not unproblematic. The interest rate is determined on the bonds market, and the assumed form
of its adjustment equation implies that the excess supply of bonds equals the excess
demand for money. However, it remains unclear how possible excess demands in the
goods market are nanced. In a properly specied model this excess demand should
inuence the excess supply of bonds. Cf. Lorenz (1993b) for an example.

13

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 Hopf bifurcation
theorem are fullled.

5.2. The Coupling of Oscillators

181

Consider now three economies, each of which is described by equations like

(5.2.4)-(5.2.5) with possibly different numerical specications of the functions, i.e.,



Y i = i Ii (Yi , ri ) Si (Yi , ri ) ,



r i = i Li (Yi , ri ) Mi /pi ,

i = 1, 2, 3.

(5.2.6)

The equation system (5.2.6) 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 (5.2.6) constitutes a motion on a three-dimensional torus T3 .
International trade is introduced by assuming standard export and import functions Exi = Exi (Yj , Yk ), i = j, k and Imi = Imi (Yi ), respectively. In addition to
the change in the excess demand for goods, the onset of international trade can
imply a change in the money stock in country i if Exi = Imi . In the following it
will be assumed that a trade-balance disequilibrium leads to an immediate change
in the money stock.14 The resulting nine-dimensional system is



Y i = i Ii (Yi , ri ) Si (Yi , ri ) + Exi (Yj , Yk ) Imi (Yi ) ,



r i = i Li (Yi , ri ) Mi /pi ,
i = Exi (Yj , Yk ) Imi (Yi ),
M

(5.2.7)

with i, j, k = 1, 2, 3, j, k =
 i. Equation system (5.2.7) 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 (5.2.7)
may possess a strange attractor.
The result of a numerical simulation of the dynamic behavior of system (5.2.7)
is depicted in Figure 5.10. The three plots contain projections of the systems attractor on the Yi ri spaces of the three economies. The motion is chaotic in the
sense of a positive largest Lyapunov (cf. Section 6.2.4 for details). The parameters
assumed in the simulation imply that the economies i = 1 and i = 2 possess stable
foci in the autarkic case. The economy i = 3 displays a limit cycle behavior in the
autarkic case. This scenario can be considered as a hint that it may not be necessary
to encounter closed orbits in all uncoupled sub-systems before the coupling introduces a complexity to the system. Simulating a system like (5.2.7) also uncovers
that complex attractors emerge rather incidentally; most simulation runs result in
deformed closed orbits.15
14

Alternatively, it can be assumed that the central bank attempts to hold the money stock
constant in the case Exi = Imi . The only way to achieve this goal in this simple model
is to offer bonds in the bonds market. The trade-balance decit/surplus, Exi Imi ,
then has to be considered in the interest rate adjustment equation.

15

This is partly due to the specication of (5.2.7). The discussion of the uniqueness of
limit cycles in Section 2.3 has shown that standard, two-dimensional oscillator systems
like the Lienard equation (which are usually assumed in discussions of coupled oscillator

182

Chapter 5

r1

r2

Y1

r3

Y2

Y3

An Example of Chaotic Motion in the Coupled System (5.2.7) with 3 Countries;

Ii = 8 arctan(0.025Yi ) 10ri , Si = 0.15Yi , Li = 0.1Yi 15ri , Exi = Exij +
Exik , i =
 j, k , Exij = 0.0001ij Yj3 , i =
 j , Imij = Exji , 12 = 3, 13 = 3,
21 = 4, 23 = 3, 31 = 4, 32 = 3.
Figure 5.10

This procedure of coupling autonomous oscillators can be applied to a variety

of different economic problems. A rst investigation of the inuence of dynamic
coupling was presented by Goodwin (1947) in a model describing the interdependence of markets. Larsen/Mosekilde/Rasmussen/Sterman (1988), Mosekilde/Larsen/Sterman/Thomsen (1992) and Sterman/Mosekilde (1993) studied frequency-locking behavior in a long-wave business cycle model. 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., if a sector i receives goods from a sector j , but delivers goods only to
 j , which are closer to the nal demand, then a strange attractor can
sectors h =
numerically be shown to exist.

5.3. The Forced Oscillator

In a series of papers, Cartwright/Littlewood (1945), Cartwright/Reuter
(1987), Levinson (1943a,b, 1949), 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.,
Abraham/Scott (1985), Levi (1981), Guckenheimer/Holmes (1983), Tomita
(1986)).
systems) do not occur very often in economic dynamics. For example, the IS-LM system
(5.2.6) possesses the structure of a Lienard equation only if Li /ri = 0 or if all three
functions I , S , and L are separable in their arguments.

5.3. The Forced Oscillator

183

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 deciency
may lie in the fact that the necessary periodicity of the dynamic forcing may not be
obvious in most economic applications.16
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 and unforced oscillator systems it will be shown that Goodwins 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.

5.3.1. Forced Oscillator Systems and Chaotic Motion

Consider a nonlinear, autonomous, second-order differential equation

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

(5.3.1)

Recall from Section 2.3 that equation (5.3.1) is able to generate endogenous oscillations if the functions f (x) and g (x) fulll 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 rst derivative, the equation possesses a unique
limit cycle.
The autonomous equation (5.3.1) is a special case of the more general form
+ f (x)x + g (x) = h(t),
x

(5.3.2)

with h(t) as a periodic function, i.e., h(t) = h(t + t) t. As time enters the equation in an explicit manner, (5.3.2) is called a nonautonomous differential equation.
Equation (5.3.2) is called a forced oscillator when f (x) and g (x) fulll the requirements of an oscillator. If the amplitude of the forcing term h(t) is small relative to
the dampening term f (x), (5.3.2) is called a weakly forced oscillator . Otherwise, the
oscillator is called a strongly forced oscillator.
While the weakly forced oscillator does not add essentially new qualitative properties to the dynamic behavior of (5.3.1) in fact, the oscillator is still characterized
by a limit cycle behavior the strongly forced oscillator may involve the emergence
of irregular dynamics. Consider the following special form of equation (5.3.2), i.e.,
a dynamically forced equation of the van-der-Pol type:17
x
a(1 x2 )x + x3 = a cos t,

(5.3.3)

16

Cf., however, Samuelson (1947), pp. 335ff., for an early discussion of the role of exogenous forcing in dynamic economic models.

17

In the original van-der-Pol equation the cubic term of (5.3.3) is replaced by g (x) = x.

184

Chapter 5

8.2

x (t)

8.1

x(t)

The Motion in a Forced Oscillator System: x

0.1(1 x2 )x + x3 = 10 cos(t)
Figure 5.11

with a determining the amplitude of the forcing term and inuencing its frequency.18
The result of a numerical simulation of (5.3.3) is shown in Figure 5.11. The
object represents a chaotic attractor with a positive largest Lyapunov exponent (cf.
Section 6.2.4 for details). Similar attractors can be generated when different odd
terms g (x) are assumed in (5.3.2).
Forced oscillator systems do not only possess chaotic attractors but can generate
complex transient behavior even if the attractor is a regular object. The following heuristic argument attempts to explain the reason for this complex transient
motion. When a is large, the dynamic behavior of (5.3.3) 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.19
18

System (5.3.3) can be interpreted as a three-dimensional system when t is considered a

state variable with t = 1, i.e., the system (5.3.3) can be written as
x = y,

y = a(1 x2 )y x3 + a cos t,

t = 1.

Writing (5.3.3) in this three-dimensional form uncovers that the system can be a candidate for chaotic dynamics although only two state variables seem to be involved in
(5.3.3).
19

For details on the construction of the Levi-Poincare map see Levi (1981) and Guckenheimer/Holmes (1983).

5.3. The Forced Oscillator

The Levi-Poincare Map

Figure 5.12

185

The Region B-C of the Map

Figure 5.13

Figure 5.12 shows the Levi-Poincare map of equation (5.3.3). According to the
construction of Poincare maps, a xed point of the map corresponds to a closed
orbit in the original ow. The four xed points A through D in Figure 5.12 therefore represent four closed orbits of equation (5.3.3). As the absolute slopes of the
graph of the Levi-Poincare map are smaller than 1 at the xed points A and D, the
corresponding closed orbits in the ow are stable. Equivalently, the unstable xed
points B and C represent unstable closed orbits.
The existence of two stable closed orbits implies that the dynamic behavior of
(5.3.3) 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 LeviPoincare 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 nal 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 5.13).
It is possible to nd initial values in this region of the Levi-Poincare map which
generate a period-three cycle, namely
3 < 2 < 1 < 4 .

(5.3.4)

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 approximation. As chaotic motion in a Poincare map implies irregular behavior
of the underlying ow as well, the essentially three-dimensional differential equa-

186

Chapter 5

tion (5.3.3) is therefore characterized by chaotic motion as long as its trajectory is

located in a region corresponding to B-C in the Levi-Poincare map.
It is obvious from Figure 5.12 that the region B-C is not a trapping region. The
system can leave the region and will eventually converge to one of the two stable
xed points A or D. The possibly complex motion in the interval B-C is then an
example of transient chaos (cf. Section 4.3 for details) .
Whether a specic forced oscillator system possesses a strange attractor or a regular attractor like a closed orbit with possibly complex transient motion (as demonstrated with the help of the Levi-Poincare map) depends on the exact algebraic and
numerical specication of the involved functions f (x) and g (x) and the forcing
term h(t). Mathematical results for the general equation (5.3.2) 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. Other economic
examples of forced oscillator systems can be found in Puu (1987, 1989) in models of international trade. Haxholdt/Larsen/Tvede/Mosekilde (1991) studied the complexity arising in the basin of attraction in another version of Goodwins nonlinear accelerator model. Models of economic long waves are described
in Larsen/Morecroft/Thomsen/Mosekilde (1991), and Mosekilde/Larsen/
Sterman/Thomsen (1992).

5.3.2. Goodwins Nonlinear Accelerator as a Forced Oscillator

Goodwins (1951) nonlinear accelerator model is usually quoted as a milestone in

the development of nonlinear business cycle theory because it represents an early
alternative to the restrictive linear multiplier-accelerator models of the SamuelsonHicks type. However, most textbooks deal only with Goodwins simplest case,
namely that of a piecewisely dened accelerator in different stages of the business
cycle. For the purpose of this section, Goodwins nal modication of his basic
model deserves the greatest attention because it constitutes one of the very few
economic examples of a forced oscillator system when specied appropriately.
By introducing lagged investment outlays, Goodwin (1951) nally obtained the
second-order, nonautonomous differential equation



y + + (1 ) y (y ) + (1 )y = I a (t)

(5.3.5)

with y as income, as the marginal rate of consumption, as a constant expressing

a lag in the dynamic multiplier process, as the lag between the decision to invest
and the corresponding outlays, (y ) as induced investment, and I a as the amount
of autonomous outlays at t.
First consider the case in which I a (t) = 0 t. Equation (5.3.5) is then an
autonomous differential equation of the so-called Rayleigh type, which can easily be
transformed into an equation of the van-der-Pol type. Differentiating (5.3.5) with

5.3. The Forced Oscillator

187

respect to time and substituting x for y yields:



y + + (1 ) y  (y )
y + (1 )y = 0

(5.3.6)

x
+ A(x)x + B (x) = 0,

(5.3.7)

or





with x = y , A(x) = + (1 )  (x) /() and B (x) = (1 )x/(), i.e.,
B is an odd function with respect to x = 0. It can be shown that (5.3.7) possesses a
unique limit cycle if A(x) is an even function with A(0) < 0 and A (0) > 0.20
By means of graphical integration Goodwin illustrated that the transformed
equation (5.3.6) or (5.3.7) possesses a unique limit cycle which shifts in phase space
if the outlay I a (t) is occasionally altered. If the shifting is irregular, the resulting
trajectories of income naturally deviate from harmonic motion.
Now consider the case of a time-dependent outlay function such that I a (t) is
-periodic over the business cycle, i.e., I a (t + ) = I a (t); > 0. Let ia (t) =
I a (t)/(). If I a (t) is a periodic function, ia (t) is periodic as well, and equation
(5.3.5) turns into a forced oscillator. Suppose for simplicity that ia (t) has a sinusoidal form, e.g., ia (t) = a sin t, a > 0.
Under the assumptions regarding the functions A(x) and B (x) and the periodicity of exogenously determined outlays, (5.3.5) is then qualitatively identical with
the forced van-der-Pol equation. Goodwins nonlinear accelerator model with periodic forcing can generate chaotic motion.

5.3.3. 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 performed which offset major economic variables to some degree but which
are not suited for neutralizing economic uctuations 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 system behaves chaotically.
Consider the following thought experiment.21 Suppose that the dynamic behavior of an economy is precisely determined by the following standard laws of motion:
20

Compare Section 2.3 on the uniqueness of limit cycles.

21

A longer version of the following model can be found in Lorenz (1987c).

188

Chapter 5

net income reacts positively to excess demand in the goods market, i.e.,



Y = I (Y, r) S (Y, r) ,

> 0,

(5.3.8)

with as an adjustment coefcient, I (Y, r) as net investment with Ir < 0, IY > 0

and the Kaldorian sigmoid form of I (Y, ), and S (Y, r) as savings with SY > 0 and
Sr > 0.
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., 22



r = L(Y, r) M /p ,

> 0,

(5.3.9)

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.
Finally, assume that prices change according to a simple Phillips relation:
p = (Y Y ),

> 0,

(5.3.10)

with Y as the natural level of income.

Summarizing, equations (5.3.8)-(5.3.10) constitute the three-dimensional continuous-time system



Y = I (Y, r) S (Y, r)



r = L(Y, r) M /p
p = (Y Y ).

(5.3.11)

Suppose that the interest rate adjusts immediately to discrepancies between the
demand and supply of money such that
r = 0 = L(Y, r) M /p

t,

(5.3.12)

and assume that (5.3.12) can implicitly be solved for r with

r = r(Y, p),

rY > 0,

rp > 0.

(5.3.13)

Substitution for r in (5.3.8) and (5.3.9) leads to the two-dimensional continuoustime system



Y = I (Y, r(Y, p)) S (Y, r(Y, p)) ,
p = (Y Y ).
22

Compare the remarks on this assumption made in Section 5.2.2.

(5.3.14)

189

5.3. The Forced Oscillator

Under certain assumptions the system (5.3.14) constitutes an oscillator, i.e., a dynamical system which is able to endogenously generate uctuations. Differentiating
the income adjustment equation with respect to time yields



Y = IY Y + Ir (rY Y + rp p ) SY Y Sr (rY Y + rp p ) .

(5.3.15)

Rearranging terms and substituting for the price adjustment p leads to







Y IY + Ir rY SY Sr rY Y Ir rp Sr rp p = 0,
(5.3.16)






Y I + I r S + S r Y I r S r (Y Y ) = 0.
Y

r Y

r Y

r p

r p

Let A(Y ) = (IY + Ir rY SY Sr rY ) and B (Y ) = (Ir rp Sr rp )(Y Y )

and write (5.3.16) as
Y + A(Y )Y + B (Y ) = 0.

(5.3.17)

In order to establish a result on the oscillation properties of (5.3.17), the following

simplifying assumptions will be made:
Assumption 5.1: Ir , Sr , and rp are constant.
This assumption implies that B (Y ) is an even function with B (Y ) > ( < ) 0 if
Y
Y > (<) Y . Furthermore, lim Y B ( )d = .
Y

Assumption 5.2: A(Y ) is an even function of Y with respect to Y , and

A(Y ) < 0 at Y . Furthermore, Y > Y such that A(Y ) > 0 Y > Y
and A(Y ) is nondecreasing Y > Y .
Y
A( )d = .
Y Y
Assumptions 5.1 and 5.2 have the following consequence:

Assumption 5.2 implies that lim

Proposition 5.1 If Assumptions 5.1 and 5.2 hold true, then (5.3.17)
has exactly one limit cycle.
Proof : With the assumed properties, equation (5.3.17) 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 5.14 illustrates one possible form of the
function A(Y ), whose properties do not seem to allow a simple generalization of
the proposition.
Equations (5.3.8)-(5.3.10) were postulated under the assumption that the government does not intervene in the economic process. If the equations (5.3.8)
(5.3.10) indeed describe the evolution of the economy and if assumptions 5.1 and

190

Chapter 5

A(Y ) as an Even Function

Figure 5.14

5.2 hold true, i.e., if the economy is oscillating, the government may encounter
the task of stabilizing the uctuating economy. This necessitates perception of the
dynamic behavior of the economy. While it is certainly unreasonable to assume
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 5.3: The time series of income values Y (t) observed in the
past and generated by (5.3.17) are approximated by Y (t) = Y + a sin t
with a and chosen to t 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 (5.3.8) turns into



Y = I (Y, r) S (Y, r) + D(t) .
(5.3.18)
Obviously, the government has to determine an optimal date t0 for the beginning of
the program. Without precise knowledge of the underlying structure of the economy even this seemingly simple task may be difcult. Suppose, for example, that
t0 is chosen such that the (absolutely) maximum impetus occurs when the laissezfaire 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.

191

5.3. The Forced Oscillator

Suppose that the policy is introduced at a point in time t0 :

23




Y (t0 ) = I (Y (t0 ), r(t0 )) S (Y (t0 ), r(t0 )) + D(t0 )



= I (Y (t0 ), r(t0 )) S (Y (t0 ), r(t0 )) + a sin (t0 ) .

(5.3.19)

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., t0 = :



Y (t0 ) = I (Y (t0 ), r(t0 )) S (Y (t0 ), r(t0 )) + a sin (t0 )



= I (Y , r(t0 )) S (Y , r(t0 )) + a sin (t0 t0 ) ,

(5.3.20)

with Y ( ) < 0. Rescale the time axis by setting t0 = 0 at t0 such that the income
adjustment equation can be written as



Y = I (Y (t), r(t)) S (Y (t), r(t)) + a sin t ;

t t0 = 0,

(5.3.21)

with Y (0) and r(0) determined appropriately.

Correct timing of the introduction of the policy requires that, at t0 = 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 t0 ,
provided that sin t0 = 0, i.e., that the program is initiated at t0 .
The dynamics of the economy are described by the income adjustment equation
(5.3.21), the adjustment equation of the price level (5.3.10), and equation (5.3.12)
for the instantaneously adjusted interest rate. Differentiating (5.3.21) with respect
to time and performing basically the same procedure as above leads to
Y + A(Y )Y + B (Y ) = a cos t,

(5.3.22)

with A and B as dened above.

Assumption 5.4: i) The adjustment coefcient in (5.3.22) is greater
than 1, and furthermore, ii) the product of the coefcient a and the
adjustment coefcient is greater than 1.
If i) holds true, ii) can easily be justied because the amplitude-controlling parameter is surely greater than 1 in order to speak of a relevant business cycle model.
Under assumptions 5.1-5.4, equation (5.3.22) is a strongly forced oscillator of
the Lienard type. It follows that for appropriate parameter values the system can
possess a chaotic attractor or display complex transient behavior. 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 in a suspension of Keynesian ideas in this stylized model economy. Though the demand policy
has simply been superimposed upon the economys self-sustained evolution with no
feedback processes between the state of the economy and government expenditure,
23

Note that sin t = sin(t ).

192

Chapter 5

it may appear to the government as if its policy is not well designed and that the
perception of the economys laws of motion is incorrect. 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.

5.3.4. 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 inuenced by an
exogenous force, the outcome may be unpredictable. The effect of the forcing may
consist in increased amplitudes, total dampening 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 nd economic examples
of forced oscillator systems. However, most examples can be criticized because the
necessary assumptions seem to be articial 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 probably be found in most other economic
examples of forced oscillator systems. Summarizing, forced oscillator systems in
economics implying 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.

5.4. 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, it
has turned out that homoclinic orbits play an important role in the emergence of
chaotic motion in many continuous-time systems and that complicated invariant
sets exist in the associated Poincare maps.
The following section contains a brief presentation of the Shilnikov scenario
and presents a result by Arneodo et al. (1981) which can be handled rather easily.
This specic analytical example is demonstrated with a simple modication of a
standard business cycle model in the second section.

193

5.4. Homoclinic Orbits and Spiral-Type Attractors

5.4.1. The Shilnikov Scenario

Section 4.3.2 contains a brief description of the horseshoe map and the complicated
dynamics initiated by the presence of its invariant set. However, it is usually difcult
to establish the existence of such an invariant set in a specic system. A theorem by
Shilnikov (1965) provides sufcient conditions for the existence of horseshoes in
the Poincare map of a three-dimensional, continuous-time system.24 The theorem
rests on the existence of homoclinic orbits (cf. Figure 5.15 for a standard homoclinic
orbit in R2 ).

A Homoclinic Orbit for a Flow in R2

Figure 5.15

Consider the following specication of a three-dimensional system:

x 1 = x1 x2 + P1 (x1 , x2 , x3 ),
x 2 = x1 + x2 + P2 (x1 , x2 , x3 ),
x 3 = x3 + P3 (x1 , x2 , x3 ).

(5.4.1)

with Pi , i = 1, 2, 3, as C r functions (1 r ) vanishing together with their rst

derivatives at the origin 0 = (0, 0, 0).
Theorem 5.2 (Shilnikov (1965)):25 Assume that the vector eld
(5.4.1) has a xed point x such that
(i) the eigenvalues at x are i and with || < || and =
 0;
(ii) there is a homoclinic orbit for x .
24

Cf. Section 4.3.2. Details are described in Guckenheimer/Holmes (1983), pp. 319ff.,
and Arneodo/Coullet/Tresser (1981), p. 574.

25

Cf. Guckenheimer/Holmes (1983), p. 319, for details.

194

Chapter 5

Then there is a perturbation of (5.4.1) such that the perturbed system

has a homoclinic orbit  near and the Poincare map of  for the
perturbed system has a countable set of horseshoes.
A geometric illustration of a homoclinic orbit which is consistent with the Shilnikov
scenario is given in Figure 5.16. After leaving the equilibrium point on the unstable
manifold, a trajectory returns in an oscillating manner toward the equilibrium on
the stable manifold.

A Shilnikov-Type Homoclinic Orbit

Figure 5.16

While the fulllment of the local conditions (i) of this theorem can easily be
examined, the required presence of a homoclinic orbit constitutes a major obstacle
which in most cases prevents a direct application of the theorem.26 Fortunately,
some specic dynamical systems are known which possess a homoclinic orbit and
allow the fulllment of the local stability properties of the Shilnikov theorem to be
easily veried.
In a series of papers, Coullet/Tresser/Arneodo (1979), Arneodo/Coullet/Tresser (1981, 1982), and Tresser (1982)27 demonstrated that the dynamical
system
+ ax + x = z,
x
z = f (x),

(5.4.2)

or, written as a third-order differential equation,

x
+ x = f (x),
+ ax

(5.4.3)

26

A numerical algorithm for the detection of homoclinic orbits is described in Beyn

(1990).

27

Compare also Glendinning/Sparrow (1984).

5.4. Homoclinic Orbits and Spiral-Type Attractors

195

with a as a constant, exhibits chaotic behavior for appropriate forms of the oneparameter family of functions f (x). For example, the specication f = x(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 magnitude of the parameter .28 Other forms of the function f
with similar non-invertibilities lead to comparable results.29

5.4.2. Spiral-Type Chaos in a Business-Cycle Model with Inventories

As a very simple economic example of the emergence of a chaotic motion in threedimensional systems analogous to the cases studied by Arneodo et al. consider the
following modication of a macroeconomic business-cycle model with inventories
which in its discrete-time formulation was rst discussed by Metzler (1941). A
continuous-time version of the model is studied in Gandolfo (1983)30 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 = B d (t) B (t) ,

> 0,

(5.4.4)

with B d (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),

(5.4.5)

with S and I as savings and investment, respectively. The desired inventory stock is
assumed to depend linearily on the expected output, Y e (t), in t
B d (t) = kY e (t),

k > 0,

(5.4.6)

implying that
B d (t) = k Y e (t).

(5.4.7)

28

A geometric description of the dynamical behavior in these spiral-type attractors can be

found in Berge/Pomeau/Vidal (1986), pp. 119f.

29

For example, Arneodo et al. (1982) studied equation (5.4.3) with the piecewise-linear
tent function

f (x) =

1 + ax

if

x < 0,

1 x if

x 0,

with a > 0 and > 0 as parameters.

30

Cf. Gandolfo (1983), pp. 259ff.

196

Chapter 5

The expected output is determined according to a modied hypothesis of extrapolative expectations which considers not only the rate of change of current output
but which also includes the changes in this rate:
Y e (t) = Y + a1 Y (t) + a2 Y (t).

(5.4.8)

Thus, expected output changes according to

Y e (t) = Y + a1 Y (t) + a2 Y (t).

(5.4.9)

Differentiating (5.4.4) with respect to time and substituting for B d (t) and B (t)
yields the third-order differential equation
ka1 1
S (t) I (t)
1
Y +
Y + Y =
,
ka2
a2
ka2

(5.4.10)

or, abbreviated,



Y + A1 Y + A2 Y = S (t) I (t) .

(5.4.11)

Gandolfo (1983) demonstrated that (5.4.11) is unstable when savings is a linear

function of output, e.g., S (t) = (1 c)Y (t) S0 , 1 c > 0, when investment is
autonomous, i.e., I (t) = I0 , I0 > 0, and when A1 < 0.31

Savings and Investment in a Modied Metzler Model

Figure 5.17
31

Theoretically, A1 can be positive or negative depending on the relative magnitudes of

, k, and a1 . However, negativity seems to be more convincing when the adjustment
coefcient is low.

197

5.4. Homoclinic Orbits and Spiral-Type Attractors

Y
The Spiral-Type Attractor of (5.4.12); Y versus Y
Figure 5.18

Y
The Spiral-Type Attractor of (5.4.12); Y versus Y
Figure 5.19

198

Chapter 5

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 modied Metzler model has the form of (5.4.3) with a noninvertible function f ().
Dene Y , B d , 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 = B d B d , b =
B B , s = S S , and i = I I . Equation (5.4.11) then becomes



y + A1 y + A2 y = s(t) i(t) .

(5.4.12)

Assume that both savings and investment are nonlinear functions of output. Possible shapes of the functions are illustrated in Figure 5.17 where it has been assumed
that 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 f (x) = x(d x) used by Arneodo et al. (1981) for the case of
d = 1.
Assumption 5.5:
properties:

Equation (5.4.12) is characterized by the following

(i) A1 > 0 and A2 close to unity.




(ii) s (y ) i (y ) is a one-humped function f (y ) with a critical value
yc > 0, the slope of which can be controlled by a single parameter .
Under Assumption 5.5, the Metzlerian model (5.4.12) is nearly identical with equation (5.4.3). The Lie derivative (the divergence) of (5.4.12) is negative because of
A1 > 0.32 The system is therefore volume contracting and possesses an attracting
invariant set. Figures 5.18 and 5.19 show the results of a numerical investigation
of (5.4.12) in (Y Y ) space and in (Y Y ) space. The dynamic behavior
of (5.4.12) is not essentially different from that of (5.4.3) and it can be seen that
(5.4.12) possesses a Shilnikov-type structure for the assumed values of A1 , , and
the slope of the excess supply function. In contrast to logistic, one-dimensional
difference equations, rather at shapes of the one-humped curve are sufcient to
encounter chaotic motion.33
The basin of attraction of the attractor is depicted in Figures 5.20 and 5.21.
White areas represent the basin of attraction; the grey-shaded areas constitute the
32

The numerical calculation of Lyapunov exponents (cf. Section 6.2.4.) for the assumed
parameters yields a positive and a negative exponent in addition to the zero exponent.
Cf. Lorenz (1992c) for details.

33

In the numerical investigation of equation (5.4.3), Arneodo et al. (1982) detect the
Shilnikov attractor for a = 0.4 and < 1. Larger values of lead to the appearance
of regular periodic or double-periodic attractors.

199

5.4. Homoclinic Orbits and Spiral-Type Attractors

Y
Figure 5.20: Basin of Attraction of (5.4.12), (Y Y space)

Y
Figure 5.21: Basin of Attraction of (5.4.12), (Y Y space)

200

Chapter 5

basin of innity.34 It can be seen that the basin is formed by a relatively narrow
region. Initial points that are not very close to the attractor will diverge from it.
It is also possible to encounter other types of behavior in system (5.4.12). For example, slightly different parameter values imply the existence of multiple complicated attractors, the basins of attraction of which constitute fractal sets (cf. Lorenz
(1993a)).
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 Shilnikov scenario. It can be expected that several other modications of the model are possible which still imply the emergence of a Shilnikov-type
attractor when the excess supply function is noninvertible. However, as was pointed
out by Gandolfo (1983), 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 Shilnikov theorem will probably be complicated.

34

The overlapping of the basin boundaries and the attractors in Figures 5.20 and 5.21 is a
result of different projections: for example, in Figure 5.20 the attractor is a projection of
the three-dimensional state space to the Y Y plane (with a Y = 0 coordinate) while Y
is, of course, changing during the motion; the basin has been calculated for a constant
initial value of Y .

Chapter 6

Numerical Tools

he theoretical results presented above allow to establish the existence of chaotic

trajectories in several dynamical systems, which fulll the assumptions of the
appropriate theorems. For example, when the difference equation is unimodal, it
is possible to apply the Li/Yorke theorem or Sarkovskiis theorem and to establish
the existence of chaos (dened in the sense of one of the denitions provided in
the previous chapters). However, in many cases it may be difcult 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 evidencing 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 fulll the assumptions of the standard
theorems but which appear as good candidates for chaotic systems.

The following tools can be useful in deciding whether an actual statistical time series
or a time series generated by a simulation of a known dynamical system is regular,
chaotic, or stochastic.1
1

However, it must be stressed at the beginning that (abstracting from spectral analysis)
the usage of these tools is in very early stages and that the progress in this eld is rapid.
The following survey is therefore neither complete nor very in depth.

202

Chapter 6

6.1. Spectral Analysis

If a deterministic 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 monotonic 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,
noise generated by the use of specic algorithms during the simulation, or to
the design of digital computers implying specic problems in the representation
of numbers.

Spectral analysis 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).2
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.3 Assume that a time series xj , j = 1, . . . , n of a single variable has
been observed at equi-distant points in time. The Fourier transform of the series xj
is dened as
n
1 
x
xj e(i2jk/n) ,
k =
n

k = 1, . . . , n,

(6.1.1)

j =1

with i = 1. The inverse Fourier transform maps the x

k back to xj with the difference that xj is now periodic, i.e., xj = xj +n :
n
1 
xj =
x
k e(i2jk/n) ,
n

k = 1, . . . , n.

(6.1.2)

k=1

See, for example, the pioneering work of Granger/Hatanaka (1964) for an elaborated
introduction. Cf. Dale (1984) for applications in business cycle theory.

Cf. Berge et al. (1986), pp. 43ff., and Medio (1993), pp. 101-114, for comprehensive
surveys of Fourier transforms and power spectral analysis.

6.1. Spectral Analysis

203

Consider next the autocorrelation function dened as

1
=
xj xj +m ,
n
n

(6.1.3)

j =1

with m as the lag between the correlated values. By applying the Fourier transform
to (6.1.3) and substituting for xj , (6.1.3) becomes
m



n
2
mk
1
.
=
|x
k |2 cos
n
n

(6.1.4)

k=1

The inverse of (6.1.4) is4



n
2mk
1 
.
|x
k | =
m cos
n
n
2

(6.1.5)

m=1

The function |x
k |2 is thus proportional to the Fourier transform of the autocorrelation function. The graph obtained by plotting |x
k |2 versus the frequency f =
(2 )/n is called the power spectrum.5
A power spectrum can loosely be dened as each frequencys 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 with a peak at
the origin.6 If there are frequencies for which the associated |x
k |2 are signicantly
higher than for others, spectral analysis indicates the existence of periodic behavior.
The interpretation of the peaks depends on the underlying time concept.
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 associated frequency. Power spectra with several distinguishable peaks indicate
the presence of quasi-periodic behavior. The dominating peaks represent the basic
incommensurable 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 rst peak, respectively, correspond to a
period-4 cycle, 7 peaks correspond to a period-8 cycle, etc. If a continuum of peaks
emerges7 , the power spectrum is said to reect broad band noise. The motion is then
either purely random or chaotic for both underlying time concepts.
4

Cf. Berge et al. (1986), p. 47, for details.

In practical numerical work the Fourier transform is usually replaced by the Fast Fourier
transform, which (as the name suggests) is a much faster algorithm than the original
transformation.
Depending on particular statistical procedures like detrending and tapering the slope
of the curve can be different.
It may be difcult to decide whether a continuum indeed prevails because subharmonics
may add an unknown number of peaks to the spectrum.

6
7

204

Chapter 6

Figures 6.1.a to 6.1.d represent power spectra of the logistic equation for different values of the bifurcation parameter . Figure 6.1.a illustrates the power
spectrum for = 2.5. The xed point of the map is stable, and the power spectrum
displays no peaks at positive frequencies. Figure 6.1.b depicts the case of a stable
period-2 cycle ( = 3.2). The power spectrum possesses a peak at a frequency of
0.5. The additional peak in Figure 6.1.c indicates the existence of a period-4 cycle
( = 3.5). Cycles of higher order would generate additional peaks to the left and to
the right of the single peak in the gure. Figure 6.1.d contains the power spectrum
for a value of in the chaotic regime. There does not exist a peak that clearly
dominates all other peaks.
PS

PS

Frequency
PS

Frequency
PS

Frequency

Frequency

Power Spectra for the Logistic Equation

= 2.5 (upper left); = 3.2 (upper right); = 3.5 (lower left); = 4.0 (lower right)
500 Iterations; First-Degree Polynomial Detrending
Figure 6.1

While power spectra are thus particularly useful in investigating the periodic behavior with few frequencies of higher-dimensional dynamical systems, chaotic and
random behavior cannot be discriminated with this method. It might even be
impossible to discriminate between chaotic and quasi-periodic behavior. The following section presents some concepts which can provide more denite answers
to the question of which type of behavior prevails in a dynamical system or a time
series.

6.2. Dimension, Entropy, and Lyapunov Exponents

205

6.2. Dimension, Entropy, and Lyapunov Exponents

The short presentation of spectral analysis has shown that traditional statistical techniques fail to provide a denite 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.8

6.2.1. 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 like9
xit+1 = gi (xt ),

x Rn ,

i = 1, . . . , n,

(6.2.1)

and let a certain xj be the variable which attracts the attention of an observer. The
observer neither knows the structural form of (6.2.1) and its dimension n (and
 j , in (6.2.1) ), nor can he
therefore the values of all relevant other entries xit , i =
j
be sure that his measurement of the quantity xt is correct. Denote the observed
value of the variable xj at t as x
jt and let
jt = h(xt ),
x

(6.2.2)

i.e., the observed variable depends on the true values xit , i = 1, . . . , n, but the
jt and xjt .
measurement of the variable10 may imply differences between x
The measurement procedure over time generates a time series {x
jt }Tt=1 . An
embedding is an articial dynamical system which is constructed from the onedimensional time series in the following way: consider the last element x
jT in
8

9
10

Surveys of the following topics can be found in Berge et al. (1986), pp. 144ff. and
279ff., and with an overview of economic applications, in Frank/Stengos (1988b) and
Peters (1991). Concise survey are provided in Brock (1990) and Sayers (1991). The
more technically interested reader should consult Eckmann/Ruelle (1985), Barnett/
Chen (1988a), Brock (1986, 1987b, 1988a), Brock/Sayers (1988), Medio (1993), Ch.
6 and 7, and Scheinkman (1990).
The continuous-time case can be treated analogously. Details are described in Guckenheimer/Holmes (1983), pp. 280 ff., and Takens (1981).
Brock (1986), p. 170, calls the function h a measuring apparatus.

206

Chapter 6

the observed time series and combine it with its m predecessors into a vector
m
xjT , x
jT 1 , . . . , x
jT m+1 ). Perform this grouping for every element x
jt in
x
T = (
the descending order t = T, . . . , t0 . The m 1 elements xj , = 1, . . . , t0 do not
m
have enough predecessors in the time series. It follows that only T m vectors x
t
can be generated. In this way, the scalar entries in the original time series have
m
been rearranged into the m-dimensional vectors x
t :
m
= (
xjT , x
jT 1 , . . . , x
jT m+1 )
x
T
m
xjT 1 , x
jT 2 , . . . , x
jT m )
x
T 1 = (
..
.
m
= (
xjt0 , x
jt0 1 , . . . , x
jt0 m+1 )
x
t0

(6.2.3)

11
m
of the observawith t0 = m. The m-dimensional vector x
T is called the m-history
j
tion x
T . Since the rst elements do not possess a sufcient number of predecessors,
T
m
the sequence of the vectors {x
t }t=t0 is shorter than the original time series and
varies with the value of m. The number m is called the embedding dimension.
Each m-history describes a point in an m-dimensional space, the coordinates of
T
m
m
which are the delayed observed values in the vector x
t . The sequence {x
t }t=t0
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 (6.2.1) if12

i) the variables xi of the true dynamical system are located on an attractor, i.e.,
transients have been excluded,
ii) the functions gi (x) in the true dynamical system and the observation function
h(x) are smooth functions, and
iii) m > 2n 1.
If conditions i) - iii) are fullled, it is thus theoretically possible to reconstruct
the behavior of the (unknown) true dynamical system from a single observed time
series.13 However, as n is not known for an arbitrary, observed time series, the
choice of m is vague.14
11

12

The relevant literature actually considers what might be called the m-future of an obserm
vation, namely x
xt , x
t+1 , . . . , x
t+m1 ). The qualitative properties are the same
t = (
for both orientations.
For a precise formal description of the Takens theorem compare Brock (1986).

13

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 dened as y . 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 attractor.

14

If the underlying true dynamical system is purely random, n can be thought of as being
innitely large. In that case, no m-history of observed values can therefore be found
which mimics the true system.

207

6.2. Dimension, Entropy, and Lyapunov Exponents

x
An Attractor of a Two-Dimensional, Discrete-Time System
Figure 6.2

y1

y2
A Projection of the m-History of {yt }T
1 onto the y2 y1 Space; m = 10
Figure 6.3

208

Chapter 6

The power of this method can be illustrated with a simple numerical example.
Figure 6.2 shows the attractor of a two-dimensional discrete-time system.15 The
geometric object obtained by embedding the series {yt }T1 in m-dimensional vectors
yt with m = 10 is displayed in Figure 6.3. Though the two geometric objects are
not identical they are strikingly similar. If the object in Figure 6.3 consisted of a
plasticine-like material it would be possible to transform its shape into that of the
attractor in Figure 6.2 by an appropriate kneading. The topological properties of
the object can survive in this kneading procedure.
The embedding procedure described above does not necessarily generate geometrically similar objects. When the series of xt values is lagged instead of the yt
values, no object can be generated which resembles the original attractor. Furthermore, most other projections of the ten-dimensional lagged object in the example
differ drastically from the original attractor.16
The described m-histories of an empirically observed or numerically calculated
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
briey.

6.2.2. 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 plane has dimension
2, etc., and it is difcult to imagine an object whose dimension is a noninteger
number, say 1.5. In fact, the denition of the dimension used in these examples
is that of the Euclidian dimension which is always an integer. In addition to this
denition, 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
mathematical purposes, it is very useful in understanding different notions of di15

The simulated system is

xt+1 = 0.259 0.1(xt 10.0)3 + 2.0(xt 10.0) + 80.0 yt + xt

yt+1 = 2.0 xt 0.051yt 5.0 + yt .

The system represents a numerical specication of a simultaneous price-quantity adjustment process, cf. Lorenz (1992a) for a discussion.
16

When the dynamical system under consideration is modeled in continuous time, another difculty usually arises: the time step in the simulation of the system is an arbitrarily xed quantity (or a variable quantity, depending on the underlying algorithm)
that cannot be compared with the xed time step in the discrete-time case. The time lag
is usually determined by practical considerations in these systems. A time lag of roughly
20% of a full orbit usually delivers sufcient results. For example, when the simulation
of a system generates an approximate orbit in 50 integration steps, the consideration of
every 10th value in the generated time series can deliver good results.

6.2. Dimension, Entropy, and Lyapunov Exponents

209

6.4.a.
6.4.b.
6.4.c.
Illustration of the Hausdorff Dimension for the Plane
Figure 6.4

mensions. First, consider a two-dimensional space with a single point (cf. Figure
6.4.a) and construct a two-dimensional square with length . The number N () of
such squares needed to cover this single point is obviously
N () = 1,

which is independent of the length . Next, consider a set of points located on a

line with length L (cf. Figure 6.4.b). For a given , the minimal number of squares
to cover the line entirely is
N () =

L
.

As a nal example, consider a set of points located in a rectangle ABCD which

covers a surface S (cf. Figure 6.4.c). For a given , the minimal number of squares
necessary to cover the rectangle is
N () =

S
.
2

The Hausdorff dimension DH is dened as17

DH = lim

ln N ()
,
ln(1/)

(6.2.4)

where the square used above for illustrative purposes can be replaced by hypercubes
of length . Applying this denition to the three examples in Figures 6.4.a-c yields
17

Actually, this is the so-called Kolmogorov capacity, but the designation Hausdorff dimension has become common in the dynamical systems literature.

210

Chapter 6

The Construction of a Cantor Middle-Third Set

Figure 6.5

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 attractors, namely a Cantor set. The so-called
Cantor middle-third set (cf. Figure 6.5) 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 ()
of the minimal number of lines (i.e., one-dimensional Euclidian cubes) necessary
to cover the set is obviously

..
.

= 1
= 1/3
= 1/9

=
=
=

N ()
N ()
N ()

= 1
= 2
= 4

= (1/3)m

N ()

= 2m .

(6.2.5)

For increasing m, i.e., decreasing , the Hausdorff dimension is then given as

DH = lim

ln 2m
ln 2m
ln 2
=
lim
=
 0.63,
m
m
ln(1/(1/3) ) m ln 3
ln 3

(6.2.6)

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 sufcient nor necessary for the existence
of a strange attractor in the sense of Denition 5.1.18 There exist attractors with
18

Other denitions of strange attractors, e.g., purely geometric denitions, may dissolve
this ambiguity.

6.2. Dimension, Entropy, and Lyapunov Exponents

211

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.

6.2.3. 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 Grassberger/Procaccia (1983). Let {x
it }Tt=1 be an observed time series of a
single variable and consider its m-histories as dened in (6.2.3). The m-dimensional
m
vectors x
t can be plotted in an m-dimensional phase space. If the requirements
of the Takens theorem mentioned above are fullled, 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.
mi and x
mj are said to be spatially correlated if the Euclidian
The two points x
distance is less than a given radius r of an m-dimensional ball centered at one of
mi x
mj  < r. The spatial correlation between all points
the two points, i.e., x
on the attractor for a given r is determined by counting the number of these pairs
located in a ball around every point:
C (r, m) = lim

Tm

1
[number of pairs i, j with
2
Tm
m
m
a distance x
i x
j  < r ],

(6.2.7)

Tm
1 
m
m
H (r x
i x
j ),
2
Tm

(6.2.8)

or20
C (r, m) = lim

Tm

i,j =1

19

For details compare Grebogi et al. (1984).

20

Cf. Berge et al. (1986), p. 151.

212

Chapter 6

m
with Tm as the length of the series of constructed m-histories x
t ,  as the Euclidian
norm, and H as the Heaviside function

1 if y > 0 ,
H (y ) =
0 otherwise.
The function C (r, m) is called the correlation integral. The correlation dimension is
dened as
DC (m) = lim

r0

ln C (r, m)
.
ln r

(6.2.9)

The calculated values of the correlation dimension are close to the Hausdorff dimension and do not exceed it, i.e., 21
DC DH .

(6.2.10)

Obviously, the correlation dimension can be computed more easily than the Hausdorff dimension since counting is the essential ingredient in calculating the correlation dimension: x a small r and count the number of points N (r) lying in a ball
mi and calculate C (r, m) and
mi . Perform this procedure for every x
centered at a x
DC (m).

Stylized Correlation Integral C (r, m) versus the Radius r

Figure 6.6

m and thus on the length m of

The correlation integral C (r, m) depends on x
the m-history vectors. The question of whether and how the correlation dimension
varies with changes in m thus arises. From (6.2.9) it follows that
ln C (r, m) DC (m) ln r,
21

(6.2.11)

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.

6.2. Dimension, Entropy, and Lyapunov Exponents

213

i.e., the correlation integral C (r, m) is proportional to rD . For a given m the relation between ln C (r, m) and ln r can be illustrated graphically with the correlation
dimension as the slope of the graph. Figure 6.6 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
m when the dynamical system is deterministic, whereas the slope permavectors x
nently increases in the case of a stochastic process, i.e., a process with an innite
number of degrees of freedom. In other words, if the dimension continues to grow
with the embedding dimension m, the process will be stochastic. If DC 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.

6.2.4. 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
different 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
r0 (cf. Figure 6.7.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 6.7.b, where the former radius r0
has been stretched into one direction and contracted into the other one. Denote
the major and minor axes of the ellipse as r1 and r2 , respectively, with r1 = 1 r0
and r2 = 2 r0 , or
i =

ri
,
r0

i = 1, 2.

(6.2.12)

After N steps, the radii ri will become ri = i N r0 , or, written as logs

log2 i =

ri
1
log2 0 .
N
r

(6.2.13)

22

Compare also Section 4.3.2 for a demonstration of 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.

214

Chapter 6

Suppose that the limit

1
ri
log2 0
log2 i = lim
N N
r

(6.2.14)

exists for the number of iterations (or time t in the continuous-time case) approaching innity. The numbers i in (6.2.14) are called Lyapunov numbers, while the logs
of the i s are called Lyapunov exponents denoted by i = log2 i . 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 , i = 1, . . . , n, is called
the Lyapunov spectrum of a dynamical system.
The signs of the Lyapunov exponents determine whether stretching and contracting occur in a dynamical system. If the two exponents r1 and r2 mentioned
above have opposite signs, the ellipsoid will be innitely stretched for N .
However, as the 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 (cf. the folding in the horseshoe map in Figure
4.26.b).
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.

6.7.a.

6.7.b.
Stretching and Contracting in a Dynamical System
Figure 6.7

It remains to formalize the development of the ratios ri /r0 during the dynamical
process. Consider rst the discrete-time case with an n-dimensional mapping
xt+1 = f(xt ),

x Rn ,

(6.2.15)

215

6.2. Dimension, Entropy, and Lyapunov Exponents

and two initial points x0 and x0 . Let the difference x0 = x0 x0  be small. After
the rst iteration, the difference between the two points x1 and x1 will be
x1 x1  = f (1) (x0 ) f (1) (x0 ).

(6.2.16)

A linear approximation of the difference yields

x1 x1 

where

df (1) (x0 )
x0 ,
dx

df (1) (x0 )
is the Jacobian matrix J:
dx

f1(1)
f1(1)
...

x1
xn

..
..
.
..
J=

.
.
.

(1)
(1)
fn
fn
...
x1
xn

(6.2.17)

(6.2.18)

After N iterations the difference between the corresponding points will be

xN xN  = f (N ) (x0 ) f (N ) (x0 ),

(6.2.19)

with f (N ) (x0 ) as the N th iterative. Linearization yields

df (N ) (x0 )
x0 ,
(6.2.20)
dx



where, by the chain rule, df (N ) (x0 ) /(dx) = J(N ) equals the product of the N
Jacobian matrices J in (6.2.18) evaluated along the orbit.
As J(N ) is an nn matrix, it also possesses n eigenvalues. Denote the eigenvalues
N
N
N
of this matrix as N
i and rearrange them such that 1 2 . . . n . The
Lyapunov exponents i , i = 1, . . . , n, are dened as24

xN xN

i = lim

1
log2 |N
i |.
N

(6.2.21)

From the so-called multiplicative ergodic theorem 25 it follows that this limit exists for
almost all x0 .
As an example, consider again the one-dimensional logistic equation (4.1.2).
The eigenvalue of J(1) is, of course, the rst derivative, and the eigenvalue of J(N )
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.

216

Chapter 6

is the product of the derivatives along the orbit {xt }N

t=1 (cf. (4.1.7) ). If the map

possesses a stable xed point,

$ e.g., x N= 0.6 for = 2.5, the product of the derivatives at the xed point is
= 0.5 . The Lyapunov exponent is then given as
N
= log2 (.5 )/N = 1, indicating the fact that the sequence {xt } is rapidly converging to the xed point. Table 6.1 contains the results of a simple calculation of
the Lyapunov exponent for the logistic map with = 4, i.e., for the chaotic case.
For N large, the Lyapunov exponent is positive and rapidly converges to = +1.
$N

xt

|f  (xt )|

1
2
3
4
..
.

.600
.960
.153
.520
..
.

0.799
3.680
2.771
0.160
..
.

0.799
2.944
8.158
1.307
..
.

-.321
.778
1.009
0.096
..
.

21
22
..
.

.262
.774
..
.

1.899
2.195
..
.

0.178 107
0.392 107
..
.

0.989
0.995
..
.

99

.221

2.225

0.598 1030

0.999

t=1

|f  (xt )|

(N )

Lyapunov Exponents of the Logistic Map; = 4

Table 6.1

Figure 6.8 shows calculated values of the Lyapunov exponents for the logistic
map versus the parameter . As can be seen from the gure, the exponents are
negative for values of lower than the critical value c 3.59. In the chaotic
regime, the exponents are typically positive, but there are values of with negative
Lyapunov exponents, indicating the presence of stable period points.
An analogous procedure for the continuous-time case leads to
i = lim


1
log2 Ti
T

(6.2.22)

with T R, i.e.,
% the time step between iterations tends to zero.
The sum i i , i = 1, . . . , m n can be interpreted as follows:26 The rst
Lyapunov exponent measures the extent of the ellipsoid into the rst direction, the
sum 1 + 2 measures the extent of the area dened by the rst two principal axes,
the sum of the rst three exponents measures the extent of the volume dened by
the rst three principal axes, etc. As this section deals only with dissipative systems,
the volume contracts under successive iterations. In systems with n 2, the sum of
all Lyapunov exponents must therefore always be negative.
26

Cf. Wolf (1986), p. 280.

217

6.2. Dimension, Entropy, and Lyapunov Exponents

Lyapunov Exponents of the Logistic Map; 2000 Intervals on the line

Figure 6.8

Dimension

Asymptotic
Stability

Limit Cycle
(T1 )

n=1

()

n=2

(, )

(0, )

n=3

(, , )

(0, , )

Torus
(T2 )

Chaos

(0, 0, )

(+, 0, )

Lyapunov Exponents and Dynamic Behavior in Continuous-Time Systems

Table 6.2

The meaning of the Lyapunov exponents can be interpreted as follows: when all
Lyapunov exponents are negative on an attractor, the attractor is an asymptotically
stable xed point. When one or more Lyapunov exponents are non-negative, then
at least one exponent must vanish.27 A limit cycle must involve a i = 0 and thus
cannot occur in the one-dimensional case. A torus can emerge only in at least
three-dimensional phase space. As two cyclical directions are involved in a 2-torus,
two of its Lyapunov exponents are equal to zero (the third one must be negative in
27

Cf. Eckmann/Ruelle (1985), p. 632.

218

Chapter 6

a dissipative system). If one of the exponents is positive, chaotic motion prevails.28

This can be stated explicitly in the alternative denition of chaotic motion:
Denition 6.1: A dissipative dynamical system is chaotic if the largest
Lyapunov exponent is positive.
The characterization of the behavior of low-dimensional continuous-time dynamical systems by means of their Lyapunov exponents is summarized in Table 6.2.
Empty elds indicate the impossibility of the appropriate dynamic behavior if the
dimension n is too low.
Recently, efcient algorithms have been constructed to estimate the entire Lyapunov spectrum or only the largest Lyapunov 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 modication of the algorithm of Wolf et al.
can be found in Kurths/Herzel (1987). The algorithm proposed by Benettin/
Galgani/Strelcyn (1980) permits the calculation of the entire Lyapunov spectrum. Dechert/Gencay (1990, 1992) and Gencay/Dechert (1992) describe the
calculation of all Lyapunov exponents with the help of network techniques. The exponents can accurately be determined even if the number of observations is rather
limited.

6.2.5. Kolmogorov Entropy

It was stressed several times before that a strange attractor is characterized by a

sensitivity 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 motion 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 reects the amount of information produced on an attractor 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 into hypercubes with side lengths and denote the resulting n cubes by ci , i =
1, . . . , n (cf. Figure 6.9). Consider an initial measurement x(t1 ) and suppose that
28

29

Note that chaos therefore cannot occur in a two-dimensional, continuous-time system:

with 1 > 0 and 2 necessarily equal to zero, the system would possess a repeller instead
of an attractor. The minimum phase space dimension for a strange attractor is thus
n = 3.
Cf. Grassberger (1986), pp. 292 ff., for a precise formulation of the required information to specify a trajectory.

6.2. Dimension, Entropy, and Lyapunov Exponents

219

A Partition of the Phase Space with Hypercubes in the Plane

Figure 6.9

subsequent measurements take place at specic points in time (t1 + ), (t1 +2 ), . . .

(t2 ). Denote the joint probability30 that the trajectory starting at x(t1 ) will be in cube
c1 at (t1 + ), in cube c2 at (t1 + 2 ), . . ., and in cube cn at the nal point (t2 ) by
c1 , . . . , cn . The Kolmogorov entropy is then dened as
K = lim lim lim

0 t2 0

1 
c1 , . . . , cn log c1 , . . . , cn .
t2 c

(6.2.23)

Equation (6.2.23) is numerically intractable when the joint probabilities c1 , . . . , cn

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 (, m) be the correlation integral of a time series with embedding dimension m. It can be shown that the expression31
K2 = lim lim

m 0

1
C (, m)
log

C (, m + 1)

(6.2.24)

estimates the Kolmogorov entropy very well (K2 K ). It has the advantage that it
can be computed as easily as the correlation dimension.
As the correlation integral does not change in case of a regular attractor like a
limit cycle, i.e., C (, m) = C (, m +1), the entropy K2 equals zero. If the dynamical
system is entirely random, the entropy is innite. A chaotic system is characterized
by a nite entropy 0 < K2 < , i.e., by increasing the embedding dimension the
Kolmogorov entropy approaches a nite and positive value.
30

Cf. Haken (1983a), pp. 26ff., for details.

31

Cf. Grassberger/Procaccia (1983b), pp. 2591f., or Eckmann/Ruelle (1985), pp.

649f. The variable 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., = 10 means
that only every 10th value in the time series is considered in the calculation.

220

Chapter 6

6.2.6. 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
correlation 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 specied 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.,
DC DH ,

(6.2.25)

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 reads32
DH = 1 +

1
.
|2 |

(6.2.26)

The r.h.s. of (6.2.26) 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

positive i .

(6.2.27)

In some cases, can be replaced by the equation sign; equation (6.2.27) is then
called Pesins identity.
Table 6.3 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
32
33

Cf. Ott (1981), p. 662, or Wolf et al. (1985), p. 289.

L

The general denition of the Lyapunov dimension is D = j +

the condition that

34

%j

i=1 i

> 0 and

%j +1
i=1

%j

i=1 i

|j +1 |

with j fullling

i < 0.

Calculations for other dynamical systems in different elds can be found, for example,
in Wolf et al. (1985), p. 289. Own calculations should be considered preliminary
because the excessive time consumption allowed only limited data sets.

221

6.2. Dimension, Entropy, and Lyapunov Exponents

Equation
Type

Correlation
Dimension

Lyapunov
Exponents

Kolmogorov
Entropy

Lorenz

2.05 .01

1 = 2.16
2 = .0
3 = 32.4

0.13

Rossler

2.29 0.06

1 = 0.13
2 = .0
3 = 14.1

0.011

Henon

1.21 .01

1 = .603
2 = 2.34

0.35 0.02

( )

( )

( )

Cf. eq. (4.2.1); s = 16.; r = 45.92; b = 4.

Cf. eq. (4.2.2); a = 0.15; b = 0.2; c = 10.
xt+1 = 1 1.4x2t + 0.3yt ; yt+1 = xt

Statistical Properties of Prototype Strange Attractors. Sources: Grassberger/

Procaccia (1983a,b), Vastano/Kostelich (1986), Wolf et al. (1985), own
calculations ().
Table 6.3

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 appropriate:
Step 1:

Calculate the correlation dimension. If DC is very high, the system is

dominated by random inuences and the hypothesis of the presence of
chaos should be rejected.

Step 2:

If DC is low, calculate the largest Lyapunov exponent and the K2 approximation of the Kolmogorov entropy. If a positive Lyapunov exponent can
be detected and if K2 converges to a nite positive value, it can be concluded that chaos is present.

In addition, other tests may be necessary to condently 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 sufciently low value are not precisely determined, room for subjective interpretation of the results remains in most empirical
applications.

222

Chapter 6

6.3. 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 uctuations. Much in the spirit
of the mechanistic worldview, the general tendency in reections 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 oscillating 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 necessary to include stochastic exogenous
inuences 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 minimally 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 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 inuences are included which offset the
regular cycles permanently or from time to time.
The presentation of chaotic, nonlinear dynamical systems in Chapters 4 and 5
attempted to outline a possible alternative to this stochastic linear approach. While
stochastic inuences can certainly not be completely ignored in satisfactory nonlinear approaches to real-life phenomena, nonlinear economic dynamics is mainly
interested in explaining most of the irregularity in actual time series with the help of
a deterministic approach. 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 sufcient 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 confronted with

223

6.3. Are Economic Time Series Chaotic?

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 nancial 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
exponents 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 Grassberger/Procaccia correlation dimension is calculated as
DC 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 ndings, additional tests are desirable. An attempt
to support or to reject the results of the standard procedures described above is
Brocks residual diagnostic.35



Theorem 6.1 (Residual Diagnostics) Brock (1986) : Let {at }
t=1 be a
deterministic chaotic time series. Fit a linear time series model with a
nite number of lags to the series, i.e.,
at + 1 at1 + + L atL = ut ,

t = L + 1, . . . ,

where ut is the residual at time t and 1 , . . . , L are the estimated coefcients. Then, generically, the correlation dimension and the largest
Lyapunov exponent of {at } and {ut } are the same.
Brock (1986) applied this residual test to the same detrended U.S. GNP data as
above. The autoregressive AR(2) model
x
xt1 0.42
xt2 + ut ,
t = 1.36

(6.3.1)

with x
t as detrended GNP, ts the data very well, and Theorem 6.1 implies that, e.g.,
the correlation dimension of the residuals {ut } must equal the formerly calculated
35

The following presentation of Theorem 6.1 differs slightly from the original. Although
the residual test is theoretically valid only in the innite-dimensional case, it can serve
as a discriminating tool even in low-dimensional cases.

224

Chapter 6

value for {xt }. However, the dimension nearly doubles for alternate values of the
length of the involved -cubes. It follows that the presence of chaos in the US GNP
data should be excluded.36
Another additional procedure was proposed by Scheinkman/LeBaron (1989b)
in the form of the shufe 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 shufing of the data can thus
be used as a test for deterministic nonlinear dynamics versus stochastic processes: after shufing 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 shufing.37
The numerical tools presented above have been applied to a variety of economic
data. The following list is only an excerpt of ongoing work.38 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
Brocks 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 ndings. 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 dimension. Shufing does not lead
to higher dimensions, as would be the case in the presence of chaos. Instead,
the dimensions of the shufed 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 signicantly higher dimensions. However, shufing the residuals alters the dimensions only slightly. Japanese data have a lower dimension, which is
tripled by shufing. In all countries, the largest Lyapunov exponents are slightly
negative. Summarizing, international GNP data do not seem to be chaotic, though
36

Brock (1986) points out that this phenomenon can arise in so-called unit root processes,
i.e., processes with standard deviation of {xt } close to one: although the process is
stochastic, ordered pairs (xt , xt1 ) nearly form a line in R2 , suggesting some kind of
ordering.

37

In addition to these two supplementary diagnostics, other procedures have been proposed. Brock/Dechert/Scheinkman (1987) introduced the W -statistics, which is a
family of procedures based on the correlation dimension. Cf. also Scheinkman/LeBaron (1989a). Brock/Dechert/Scheinkman (1987) developed the BDS statistics,
which is a collection of tests based on the correlation integral and which discriminates
between the null hypothesis of i.i.d. random variables and the hypothesis of deterministic chaos. Cf. Granger (1991) and Westlund (1991) for discussions of this statistic.
Surveys of recent work can be found in Frank/Stengos (1988b) and Brock (1987b).

38

6.3. Are Economic Time Series Chaotic?

Subjects

225

Authors

Social Products

Brock (1986), Brock/Sayers (1988),

Frank/Stengos (1988a, 1988c),
Scheinkman/LeBaron (1989a)
Sayers (1989), Potter (1991)

Unemployment

Sayers (1988a, 1988b, 1989)

Pig-Iron Production

Sayers (1989)

Exchange Rates

Bayo-Rubio et al. (1992),

Hsieh (1988), Papell/Sayers (1990),
Meese/Rose (1991)

Gold/Silver-Returns

Frank/Stengos (1987)

Stock-Market Returns

Eckmann et al. (1988)

Scheinkman/LeBaron (1989b)

Monetary Aggregates

Barnett/Chen (1988a, 1988b),

Barnett/Choi (1988),
Ramsey/Sayers/Rothman (1990)

Price-Quantity-Adjustments (Industrial Data)

Schmidt/Stahlecker (1989)

Experimental
Behavior

Sterman (1988),
Sterman/Mosekilde/Larsen (1988)

A Sample of Empirical Investigations of Chaotic Time Series

Table 6.4

there is evidence of low-dimensional nonlinearities. Sayers (1988a,b) studied possible nonlinearities in the unemployment rates indirectly via man-days idle to workstoppages. 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 series. The author arrives at the same conclusion in a study of business-cycle
indicators, including GNP, pig-iron production and unemployment rates for the
U.S. (cf. Sayers (1989)).

226

Chapter 6

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 rst order approximation to the exact aggregation theoretic aggregate (Barnett/Chen (1986)), and has proposed the use of
Divisa indices especially in empirical investigations of monetary aggregates. The
construction of Divisa indices relies on neoclassical macroeconomic theory and
measures the ow of monetary services as perceived by the users of these services.39
Barnett/Chen (1988a) examined several monetary aggregates with sample sizes
of > 800 observations for the presence of chaos.40 For example, the correlation dimensions of the Divisa analogs of the monetary aggregates M2 and M3 lie between
1.0 and 2.0 for embedding dimensions up to m = 6. Figures 6.10.a and 6.10.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 analogs of the Divisa-M2
index display more noise. No evidence for low-dimensional chaos can be found in
the simple sum and Divisa aggregates of M1. Ramsey/Sayers/Rothman (1990)
have demonstrated that the same original data set used by Barnett/Chen (1988a)
does not show evidence of chaos when the data is transformed to a stationary time
series.
Macroeconomic time series therefore do not seem to be good candidates for
deterministic chaos. It may be argued that statistical procedures in generating
the data 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 procedures 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 rst glimpse, nancial data like foreign exchange rates, stock exchange rates, etc. indeed appear to be potentially good candidates for chaotic time
series. Scheinkman/LeBaron (1989b) 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 for m = 14. The dimension of the residuals are reported to be the
same as those of the original series. Shufing the data signicantly increases the
dimension, implying that chaos should not be rejected. Frank/Stengos (1989)
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. Shufing
yields higher dimensions for all series. The K2 entropies of the series are in the
range of 0.15 < K2 < 0.24, and thus indicate the presence of deterministic chaos.
39

Cf. Barnett/Hinich/Weber (1986) and Barnett/Chen (1988a) for details on Divisa

indices. The growth rates of calculated Divisa monetary indexes diverge drastically from
ofcial 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.

40

See also Barnett/Choi (1988).

227

12.00
10.00

11.00

log2 Cn ()

12.00
10.50
9.00

8.00

6.00

9.00

7.50

log2 Cn ()

13.50

13.00

15.00

14.00

15.00

6.3. Are Economic Time Series Chaotic?

-13.00

-12.00

-11.00

-10.00

-9.00

log2
Case 1: DDM2
6.10.a

-8.00

-7.00

-12.00

-11.00

-10.00

-9.00

-8.00

-7.00

-6.00

log2
Case 2: DDM3

Correlation Dimensions of Divisa Monetary Aggregates

Source: Barnett/Chen (1988a) (redrawn from the original)
Figure 6.10

6.10.b

The studies mentioned above deal with statistical economic time series. Empirical 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 following 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
specic decision rule. A nal simulation 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 behavior, 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 analogs 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

228

Chapter 6

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
series. It does not seem that microeconomic data like, e.g., nancial markets
data, are per se better candidates for the presence of chaos. The presence of noise
in ofcial data, the generation of structure in constructing particular indexes,
or statistical preliminaries like detrending play essential roles in the ndings.
Even when the presence of chaotic motion cannot be established, evidence of
low-dimensional nonlinearities exists in many economic time series.

6.4. Predictability in the Face of Chaotic Dynamics

At rst 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 nitely) precise digital computers are conceptually unable to calculate the future evolution of the system. When prediction is impossible, economics
loses a major justication for its mere existence.41
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 supercial 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 deterministic systems but with purely random systems or linear systems on which stochastic inuences are superimposed. The foregoing presentation of theoretical and
empirical results 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 variables probable amplitude. In contrast, if a system
is purely deterministic and chaotic, trajectories in a higher-dimensional system diverge exponentially, but for sufciently small time horizons it is possible to predict
the systems evolution with an acceptable preciseness. Farmer/Sidorowich (1987,
1988a,b) 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 the succesor of this neighboring point
41

Compare Baumol (1987) for discussion of the predictability problem in econometrics.

6.4. Predictability in the Face of Chaotic Dynamics

Observed

229

Predicted

XtT

Xt
Actual and Predicted Phase Spaces, Prediction: T = 1 Period
Figure 6.11

to the predicted value. Numerical applications of this technique to different prototype equations show surprisingly low prediction errors for short time intervals.
The following gures show the results of applying the nearest-neighbor technique to the data obtained from simulating the two-dimensional, discrete-time
Kaldor model of Section 4.2.2. Figure 6.11 contains the phase spaces Yt vs. Yt1 of
the original system and the predicted evolution.42
The two phase spaces were obtained in the following way. The time evolution of
Y and K in the discrete-time Kaldor model was calculated in the standard fashion
for n = 10000 iterations. A transient motion of 1000 iteration has been excluded
from the consideration. The sequence {(Yt , Kt )}nnmax
represents the true motion
0 =1
of the system. Suppose that the observer considers only income as the relevant variable. The observers (predictors) task consists in deriving information on incomes
future evolution from an available data set. Assume that the predictor has access
to n0 past values of income. The number n0 of past values is called the number
of atlas points. For the purpose of demonstrating the potential power of the prediction technique the economically rather unrealistic number of 2000 initial atlas
points has been assumed. When the observer predicts the time evolution of income
based on the available information, the true system continues to evolve according
to the underlying deterministic laws of motion. In the phase space in the left part of
Figure 6.11, the pairs (Yt , Yt1 ) are shown for the iterations n = 2001 to n = 10000.
At n0 = 2000, the observer analyses the available data with the nearest-neighbor
technique. Suppose he attempts predictions only for one iteration (time step).
At the end of n0 + 1, it will be obvious whether he was wrong or right. At least,
he will know another actual (true) value of income, namely Yn0 +1 . Based on the
knowledge of n0 + 1 true values of income, he will predict the next income value
42

The calculations were performed with the NLF program of Dynamical Software.

230

Chapter 6

XtP

Xt
Actual vs. Predicted Values, Prediction: 1 Period
Figure 6.12

Observed

Predicted

XtT

Xt
Actual and Predicted Phase Spaces, Prediction: T = 10 Periods
Figure 6.13

etc. The phase space in the right part of Figure 6.11 shows the evolution of the
p
lagged pairs (Ytp , Yt
1 ) of predicted values.
Aside from a negligible fuzziness, the two objects in the phase spaces are astonishingly similar. Indeed, a statistical regression of the actual versus the predicted
time series uncovers a nearly one-to-one relation between the variables (cf. Figure
6.12) with a tremendous r2 = 0.9984.
It has been stressed many times in previous sections that trajectories of nearby
points stay together for some time even in systems with chaotic dynamics. Thus,
the coincidence of actual and predicted values in Figures 6.11 and 6.12 is not really

6.4. Predictability in the Face of Chaotic Dynamics

231

XtP

Xt
Actual vs. Predicted Values, Prediction: 10 Periods
Figure 6.14

surprising. The more relevant question concerns the longer-run predictability of

chaotic systems. For this purpose the nearest-neighbor technique has been applied
to the above income time-series with longer prediction intervals. The phase spaces
in Figure 6.13 show the evolution of the true values of income ten iterations ahead
from the prediction period (left part) and the evolution of the associated predicted
values Ynp+10 predicted in n. While the structure of the phase space of the true
system can still be recognized in the right part, the fuzziness has considerably grown.
In fact, the regression in Figure 6.14 yields an r2 of only 0.44 which is obviously
not suited to support the hypothesis of a strong correlation between the observed
and predicted values. When even longer prediction intervals are assumed, the
correlation between the actual and observed values becomes negligible.
Although research in predicting chaotic time series is still in its infancy,43 the
following conclusion can already be drawn: if a time series is chaotic it may be
possible to predict the short-run evolution with a sufcient 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
desperations in face of the complex behavior.44
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
43

Cf. Casdagli (1989) and Sugihara/May (1990) for discussions.

44

Compare, however, the results found by Frank/Stengos (1989b). Their application

of the nearest-neighbor technique described above to return rates of precious metals
uncover the need for more elaborated algorithms. Cf. also Prescott/Stengos (1991).

232

Chapter 6

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 7

Catastrophe Theory and Economic Dynamics

his nal chapter deals with catastrophe theory and its role in economic dynamics. Catastrophe theory was very popular in the 1970s and was considered a
promising technique for the modeling of discontinuous jumps in the state variables
of a dynamical system. In applications of the theory such interesting empirical
topics like the abrupt emergence of aggression in the behavior of various species,
stock-market crashes, the capsizing of ships, etc. were studied. All these examples describe phenomena which are characterized by an immediate, discontinuous
change in a variable.
After initial celebrations, it has been argued that catastrophe theory is not wellsuited as an analytical tool and that it can at best serve as a heuristic tool in preparing
a theory. Though several economic examples of applications of catastrophe theory
exist, it does not seem to be quite clear whether future work in dynamical economics will further elaborate on the theory. A short introduction will nevertheless
be presented in the following because there seems to exist a confusion regarding
the qualitative differences between chaos and catastrophes.
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.1
1

Introductions to the theory can be found in, e.g., Saunders (1980), Arnold (1984),
and Zeeman (1977), Chapters 1-2. See also Thom (1977).

234

Chapter 7

7.1. Basic Ideas2

The subject of catastrophe theory is the classication of sudden jumps or catastrophes in the behavior of dynamical systems. Consider a family of one-dimensional
functions which are parameterized by an n-dimensional vector :
V = V (x, ),

x R,

Rn

(7.1.1)

Let V be an analytic function such that it can be written as a polynomial of the

form3
V (x, ) = xn + 1 xn1 + . . . + n x0 ,

(7.1.2)

with some i being possibly equal to zero. For a given n, the graph of the polynomial
(7.1.2) has different geometric shapes when some parameters vanish. For example,
consider the case n = 4 with i = 0, i = 1, 2, 3, 4. The graph of x4 is quite different
from that of x4 + 1 x3 . Depending on the number of vanishing i s, one or several
extrema of the function may occur.
Catastrophe theory concentrates on those forms of (7.1.2) which are structurally
stable. A function like (7.1.2) with some i being possibly equal to zero is said to be
a structurally stable function if the number and the character of the functions extrema
do not change when some of these i change value.4 For example, the expression
h = x4 is not structurally stable because h = x4 + 1 x3 has additional extrema. It can
be shown that for n = 4 the polynomial x4 + 2 x2 + 3 x is structurally stable. This
structurally stable form of the polynomial (7.1.2) for a given n is called the universal
unfolding of xn . The number of parameters which is necessary to stabilize xn for
a given n is called the codimension of the unfolding, e.g., x4 has codimension two.
Catastrophe theory proves that for a codimension 4 exactly seven different
universal unfoldings exist, namely four unfoldings for the one-dimensional case
(7.1.2) and three unfoldings in the two-dimensional case. This is the essential result
of Rene Thoms famous classication theorem (cf. Thom (1977) for an introduction), in which the universal unfoldings are labelled elementary catastrophes. Table
7.1 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),
2
3
4

z Rn .

(7.1.3)

Parts of the following two sections are essentially identical with material contained in
Sections 5.2.1 and 5.2.2 in Gabisch/Lorenz (1989).
Compare for the following Saunders (1980), pp. 17ff., and Poston/Stewart (1978),
pp. 92ff.
Note that this denition 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.

235

7.1. Basic Ideas of Catastrophe Theory

Unfolding

CoDim

x3 + 1 x
x4 + 1 x2 + 2 x

Pet Name

1
2

Fold
Cusp

x + 1 x + 2 x + 3 x + 4 x

3
4

Swallowtail
Buttery

x3 xy 2 + 1 (x2 + y 2 ) + 2 x + 3 y

Elliptic Umbilic

x3 + y 3 + 1 xy + 2 x + 3 y

Hyperbolic Umbilic

y 4 + x2 y + 1 x2 + 2 y 2 + 3 x + 4 y

Parabolic Umbilic

x5 + 1 x3 + 2 x2 + 3 x
6

The Universal Unfoldings with Codimension 4

Table 7.1

Assume that the variables can be divided into fast and slow variables. For example,
let z1 be an extremely fast variable. In that case the other variables z2 , , zn can be
interpreted as parameters which change very slowly. The variable z1 immediately
reacts to disequilibria and moves innitely fast to an equilibrium value once it has
been displaced from an equilibrium value. Consequently,5
z 1 = 0 = g1 (z1 , , zn ) t.

(7.1.4)

The equation g1 (z1 , , zn ) = 0 describes an n 1 dimensional manifold in Rn .

In the catastrophe-theoretic literature it is common to denote this manifold as an
equilibrium surface. The idea that z 1 = 0 t then implies that the motion of the
system (7.1.3) is described by the n 1 remaining differential equations for zi ,
i = 2, . . . , n, dened to take place on the z1 = 0 surface.6
Assume the new symbols z1 = x, = (z2 , , zn ), and m = n 1. Equation
(7.1.4) can then be written
x = 0 = f (x, ),

x R,

Rm .

Actually, the same arguments as those provided in the discussion of relaxation oscillations in Section 2.5 can be applied to this case: it has to be assured that the variable
indeed returns to the previous value.

The idea of distinguishing variables according to their different adjustment speeds is

also realized in the so-called adiabetic approximation, which has played a major role in
the synergetics literature (cf. Haken (1983b) for details). A variable like z1 is said to be
slaved by slower variables because the motion of z1 on the manifold depends exclusively
on the change in the slow variables. The adjustment equation for the slowest variable
is called the master equation. Economic applications of this technique can be found in
Medio (1984a) and Weidlich/Haag (1983).

236

Chapter 7

Suppose that a function F (x, ) exists such that Fx f (x, ) = x . A dynamical

system which can be derived from such a function F (x, ) is called a gradient system.7
Catastrophe theory deals with dynamical systems x = f (x, ) for which F (x, ) is
identical with a member of the family of structurally stable universal unfoldings
V (x, ). In other words, it concentrates on those equilibrium surfaces which can
be interpreted as the rst derivative of a universal unfolding, i.e., f (x, ) = 0 =
Vx (x, ).
Fx (x, ) =
The properties of these specic equilibrium surfaces can be described by inspecting their singularity sets and their bifurcation sets. The singularity set S is dened
as
S = {(x, ) R Rm | Vxx = 0},

(7.1.5)

i.e., the set of all (x, ) 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 = { Rm | Vxx = 0}.

The dynamic 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 3.2.1): for 1 > 0, no equilibrium exists in the associated
dynamical system. For 1 = 0, a bifurcation occurs at x = 0, such that for 1 < 0
a stable and an unstable equilibrium branch exist.9 The rest of this section will
therefore deal with the second unfolding which has been coined cusp catastrophe.
The unfolding of the cusp catastrophe,
V (x) = x4 + 1 x2 + 2 x,

(7.1.6)

has an equilibrium surface

M:

4x3 + 21 x + 2 = 0,

(7.1.7)

and a singularity set

S:
7

8
9

12x2 + 21 = 0.

(7.1.8)

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 potential can
however be replaced by the weaker condition of the existence of a stable Lyapunov
function (cf. Section 2.1).
In the multi-dimensional case, the determinant of the Hessian matrix, i.e., the matrix
of second-order derivatives, must be equal to zero.
Cf. Gabisch/Lorenz (1989), pp. 205f., for a short discussion.

237

7.1. Basic Ideas of Catastrophe Theory

The bifurcation set can be obtained by eliminating x from M and S, yielding

B:

813 + 2722 = 0.

(7.1.9)

Incidentally, (7.1.9) is exactly the formula for the discriminant of the equilibrium
surface equation (7.1.7). It follows that (7.1.7) has three real roots, which either
all coincide if 1 = 2 = 0, or two of them coincide if 1 and 2 are distinct. As
the unfolding (7.1.6) is an object in the four-dimensional space (V (x), x, 1 , 2 ),
a geometric presentation of the cusp catastrophe has to start with the equilibrium
surface (cf. Figure 7.1)

The Cusp Catastrophe

Figure 7.1

The term cusp catastrophe is immediately obvious from the shape of the bifurcation 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 7.2) after having moved
on the upper part of the surface, the variable x will jump down to the lower part of
M in Figure 7.1.
If the long-run movement of 1 and 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
7.2).
The motion A-B-C-D-E has been drawn in Figure 7.1 under the implicit assumption that 1 changes only very slowly. When 1 is allowed to change with a higher
speed, other scenarios can occur in this model. Assume, for example, that the system is located at F. It is possible that a trajectory on the surface rst moves toward

238

Chapter 7

The Bifurcation Set of the Cusp Catastrophe

Figure 7.2

C and proceeds as described above. It might also be possible that the trajectory returns to the upper part of the surface via a route around the cusp point. In this case,
no catastrophe occurs because the bifurcation set is never crossed. Which route will
actually be followed depends, of course, on the specic forms of the equations in
(7.1.3).
The other different elementary catastrophes are naturally more difcult to illustrate 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.
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 can actually not answer the question of what precisely
happens in a roughly specied 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 specied, it is unnecessary
to refer to catastrophe theory because the dynamic 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.
Catastrophe theory has been applied to a variety of economic problems,10 including governmental behavior, stock-exchange crashes (cf. Zeeman (1977)), and
smooth dynamics in Malinvauds (1977) macro-model with rationing (cf. Blad
(1981)). Birchenhall (1979) discussed a possible structural instability in the
10

A survey of the most relevant contributions can be found in Rosser (1991). Compare
also Balasko (1978) for a critical evaluation of catastrophe theory in economics.

7.2. The Kaldor Model in the Light of Catastrophe Theory

239

Walrasian tatonnement in the light of catastrophe theory. A Cournot oligopoly

model was studied in Furth (1985). Intertemporal equilibria in an Arrow-Debreu
model were investigated in Weintraub (1980). Rosser (1983) re-considered the
re-switching debate in capital theory of the late 1960s with a form of the cusp catastrophe. A critical discussion of the role of catastrophe in economics is contained
in Balasko (1978). In the following, two economic examples of catastrophe modelling will be presented which seem to be particularly accessible.

7.2. The Kaldor Model in the Light of Catastrophe Theory

Varians (1979) extension of the Kaldor model constitutes one of the rst economic
applications of catastrophe theory. Consider the three-dimensional system11



Y = I (Y, K ) S (Y, W ) ,
= I (Y, K ) D,
(7.2.1)
K
= (W W ),
W
with W as wealth, W as the long-run equilibrium value of wealth, > 0 as
an adjustment coefcient, and D as autonomous and constant depreciation. The
investment 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. Assume
that the usual Kaldor scenario with three partial equilibria in the goods market prevails when W = W . When wealth is displaced form its long-run equilibrium value
the savings function changes its position and slope. For sufciently strong displacements of wealth from W a single equilibrium exists in the goods market. It follows
that the fold in the Y = 0 curve (cf. Figure 2.15) disappears for high and low
values of W .
A three-dimensional representation of the Y = 0 locus can be understood as
the combination of different Y = 0 layers belonging to different values of W . For
values of W in the neighborhood of W the associated (Y, K ) planes display the
typical fold region; for high and low values of W the Y = 0 curves in the (Y, K )
planes possess a negative slope. Figure 7.3 shows the Y = 0 surface for W < W .
The underlying economic scenario implies that the second part of the surface for
W > W has a similar shape, implying that actually two cusp points exist with a fold
region in the middle.
Assume that wealth and the capital stock are relatively slowly changing variables
as compared with income. The model (7.2.1) then fullls the requirements of catastrophe theory, and the system always operates on top of the equilibrium surface.
Suppose that the long-run xed point (Y , K , W ) is located on the upper
sheet of the manifold (cf. point E in Figure 7.3). If a small disturbance of the
11

A longer presentation of the model can be found in Gabisch/Lorenz (1989), pp. 209ff.
A similar model is described in George (1981).

240

Chapter 7

A Three-Dimensional Kaldor-Model
Figure 7.3

equilibrium occurs, the system returns to the equilibrium monotonically according

to the dynamics of K and W . 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 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 very
low value. Depending on the relative adjustment speeds of K and W , the motion
toward the xed point may not be characterized by a catastrophe but by a smooth
adjustment path around the cusp point. This latter path can be interpreted as
reecting a depression in contrast to the former recession 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 specication 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 modeled.

7.3. A Catastrophe-Theoretical Approach to Stagation

241

7.3. A Catastrophe-Theoretical Approach to Stagation

Macroeconomic theory has had some problems (and still has) with a phenomenon
that was coined stagation, i.e., the simultaneous presence of ination 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 inuences like, e.g., the expected
ination rate e . A modied Phillips curve
= f (u, e ),

fu < 0,

fe > 0,

(7.3.1)

with as the actual ination rate and u as the unemployment rate will therefore
shift in (u, )-space for different values of e .
The modied Phillips curve can explain the simultaneous presence of high ination and unemployment if inationary expectations are high. As the stagation
phenomenon emerged in many western countries in the mid-1970s, an increase
in inationary expectations therefore should have been observed in this period as
compared with the late 1960s when ination and unemployment exhibited the traditional trade off. However, such an increase could not be established empirically,
and the modied Phillips curve therefore does not constitute a satisfactory model
for understanding stagation.
An alternative way of modelling the stagation phenomenon was proposed by
Woodcock/Davis (1979) in the form of a catastrophe-theoretical approach. Assume that actual ination rates change according to
= g (, u, e , . . .).

(7.3.2)

Equation (7.3.2) may be thought of as a single law of motion among a set of differential equations describing the evolution of the other variables u, e , etc. In
the fashion of catastrophe theory, suppose that actual ination rates adjust to their
(partial) equilibrium values much faster than the remaining variables. If the adjustment speed is innitely high, = 0 t and the remaining variables can be treated
as parameters. The equation g (, u, e ) = 0 then describes the equilibrium surface
of (7.3.2). Writing g () = 0 explicitly as = f (u, e ) yields the same form as in
(7.3.1), i.e., the modied 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
elements 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 ination rates (cf. Figure 7.4). 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 e . Assume that
the unemployment rate can directly be inuenced by scal policy. There are surely
multiple determinants of expected ination, but it is possible that the government
and monetary authorities can manipulate expectations to some degree.

242

Chapter 7

The Woodcock/Davis Stagation Model

Figure 7.4

If the government attempts to lower the high ination 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 in the expected ination 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 ination rate drops
more or less immediately. This situation may be considered unrealistic because
drastic decreases in the ination rate are typically unobservable.
Assume therefore that governmental and monetary authorities succeed in lowering the expected ination rate while the economy is still characterized by high
actual rates. Governmental expenditure cuts will then imply a motion along A-E-F
if inationary expectations decline immediately, or along A-B-E-F if expectations
begin to decrease with a time lag.
The latter way around the cusp point requires more time to achieve the goal of
a low ination rate than the fast way over the bifurcation set at F. For a considerable
time interval rising unemployment rates go hand in hand with a gradually decreasing ination rate. Woodcock/Davis therefore claimed that motions around the
cusp point are proper descriptions of the stagation phenomenon.
The economic meaning of this scenario can be questioned. The change of the
expected ination rate affects the results in a crucial way but the model does not
explain the determinants of expected ination. Furthermore, as the slow motion
is generated by governmental expenditure cuts, the government may abandon the
anti-ination program because results are not observable within a reasonable time
interval.
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 modied
Phillips curve may t observable data better than a traditional linear approach.
Fischer/Jammernegg (1986) studied US data for the period 1966-1983 and found

7.3. A Catastrophe-Theoretical Approach to Stagation

243

7.5.a. Cusp Model

7.5.b. Linear Model
Actual U.S. Ination Rates 6:66 - 6:83 and Estimates
Source: Fischer/Jammernegg (1986), p.16 (redrawn from the original)
Figure 7.5

that an appropriately modied, discrete version of the Woodcock/Davis approach

to stagation is superior to the standard investigation of the equation
t = a + bte + cut1 .

(7.3.3)

Figures 7.5.a-b show the actual ination rates (solid lines) and the estimated ination rates (dashed lines) for the cusp model (Figure 7.5.a) and the linear model
(Figure 7.5.b). Obviously, the model inspired by catastrophe theory ts the actual
data much better, particularly with respect to peaks in the ination rate.

Chapter 8

Concluding Remarks

he 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 nal 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 and 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 particular 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
unnecessary complications and the search for simple dynamics in complicated systems. This is the same philosophy that justies partial theorizing or highly aggregated macroeconomics. The procedure can imply useful results if an economy (at
least in tendency) follows these simplied rules. While abstraction and simplication 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

Concluding Remarks

245

inuences. 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 dynamical 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 sometimes drastically change the dynamic behavior of a
standard model. For example, a competitive economy may no longer be characterized by the usual asymptotical stability 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 nonlinearities 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, inuences from other subsystems
can never be avoided; they appear in a model in the form of noise, uctuations,
and exogenous shocks. Economics will therefore particularly gain from recent attempts to understand noisy chaos, i.e., deterministic complex motion disturbed by
noisy exogenous inuences.1
Economic theory is always abstracting. It must necessarily abstract from the
number 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 ts 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 t
chaotic data sufciently well, it can be justied to use such a model in describing
reality. Alternatively, a chaotic dynamic model can be useful even if the observed
time series are not chaotic. As complex phenomena like actual economic time series
can be modeled more easily in nonlinear systems, these models seem to possess an
advantage over the traditional linear approach.
The dynamic phenomena presented in this book like local bifurcations to several xed points or to closed orbits, the existence and uniqueness of limit cycles,
1

Compare Kapitaniak (1990) for an introduction to the mathematics of noisy chaos.

An investigation of the inuence of noise on the dynamics of the Goodwin model (cf.
Section 2.4.2) can be found in Lines (1988).

246

Concluding Remarks

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 sub-disciplines of economic dynamics which still lack
an explicit formal presentation. Recent formal work on evolutionary economics
and innovation2 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 elds still to be elaborated upon. At
the least, these nonlinear phenomena may serve as an instrument in moving beyond the restricted concentration on linear dynamical systems which was typical for
the mechanistic worldview 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 immanent 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.
Nonlinear, deterministic systems like the ones considered in this book may contribute to a better understanding of economic motion but it should be stressed
that difference and differential equations do not represent the only formal tools
for descriptions of economic motion. It has recently been emphasized that mixed
difference-differential equations may constitute more appropriate dynamical systems for explaining a variety of phenomena.3 It can also be questioned whether
economic motion is appropriately specied with these various functional descriptions. An alternative modeling procedure consists in establishing a set of discrete
rules which determine the evolution of an economy. So-called cellular automata represent dynamical systems dened for discrete economic variables, the evolution of
which is determined by discrete decision rules, i.e., rules of the form: if the system
is in state Xi and if Xi fullls a specic criterion, then change Xi to Xj .4 The interesting property of these automata in the present context can be seen in the fact
that these systems are occasionally able to generate chaotic motion. The remarks
on the possible relevance of chaotic motion made in the previous sections therefore
do not seem to be superuous in the light of these recent developments.
In a somewhat speculative manner, it can be argued that chaos is an all-embracing principle of life.5 When a stable stationary point is identied with dead matter
(e.g., with inactive Schumpeterian innovators), then it is tempting to identify a vital
2

Cf. Arthur (1988, 1989) or Silverberg (1988).

Economic applications can be found in, e.g., Jarsulic (1993) and Wen/Chen (1992).
Cf. Cushing (1977) for a survey of the involved mathematics.

An overview of cellular automata systems with many examples form the natural sciences
can be found in Gutowitz (1991). An economic application is discussed in White
(1992) in a model of urban evolution.
Cf. the general discussions in Gleick (1987) and Nicolis/Prigogine (1989).

Concluding Remarks

247

organism with the opposite extreme, a chaotic state. In fact, conjectures exist that,
for example, brain waves are chaotic.6 J.D. Farmer summarizes these ideas in the
parable:7
Human beings have many of the properties of metastable chaotic solitary waves. (I say metastable because all of us eventually die and become xed points.) Old age might be dened 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. It can also not be excluded that economic reasoning will declare chaotic motion as a theoretically interesting but empirically irrelevant phenomenon. However,
the recent empirical research has uncovered the dominating presence of nonlinearities in actual economic time series, implying that economic life is almost always
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 nally be rejected on the grounds of the current ndings in many different
scientic disciplines. Once it has been accepted that the linear worldview is an articial 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, namely8
. . . (a) higher degree of order does not necessarily imply a higher content of meaning.

Cf. Glass/Mackey (1988) for a discussion of chaotic motion in biological systems.

Farmer (1982b), p. 244

Haken (1982), p. 2.

Appendix

This appendix contains some material, the knowledge of which is useful (if not mandatory)
for an evaluation of nonlinear dynamical systems but which is not directly related to the
topics mentioned in the main text. Besides, a discussion would have interrupted the line
of thought in an unnecessary way.
The rst section recalls some fundamental properties of linear dynamical systems in
continuous and discrete time. Though this book deals with nonlinear dynamical systems,
a thorough understanding of linear systems is nevertheless important because the local
stability properties of a xed point in nonlinear dynamical systems are studied with the
help of linear approximation techniques. The section briey recalls the standard methods
in solving linear one- and two-dimensional dynamical systems in continuous and discrete
time. The Routh-Hurwitz criterion and the Schur criterion for determining the stability
properties of n-dimensional dynamical systems are included for the sake of completeness.
The section also contains an outline of linear subspaces (eigenspaces) in n-dimensional
systems. These spaces are relevant for the approximation of the behavior of a nonlinear
system with the help of linear systems in the neighborhood of xed points.
When a dynamical system is nonlinear its dimension constitutes a much more relevant
aspect than in comparable linear systems. The difculties involved in the calculation of
xed points, bifurcation values of parameters, etc. increase with an increasing dimension
of a system. The investigation of the dynamic behavior of an n-dimensional system on its
center manifold occasionally represents a method for a systematic reduction of the effective
dimension of the relevant, dynamic subsystem. The outline of center manifold theory in the
second section attempts to illustrate the calculation of center manifolds for continuous-time
system with and without a parameter dependence. The discrete-time case can be treated
more or less analogously and is mentioned in passing.
The third section deals with different types of time lags in economic models. The availability of a large number of mathematical results for ordinary differential equations seems
to have distracted the attention of economists from the modeling of delayed dynamical
systems. In addition, as ordinary differential equations can implicitly represent a certain
time-lag structure, at least a rough knowledge of possible delay structures is desirable for
an understanding of dynamical systems in economics. The section also includes a short discussion of the advantages of the use of operators in investigating dynamical system. In par-

A.1. Basic Properties of Linear Dynamical Systems

249

ticular, the introduction of operators can be very helpful in studying the relation between
different types of lags or between continuous-time and discrete-time dynamical systems.
The appendix closes with a few remarks on the value of simulations in nonlinear dynamics. Numerical simulations are performed on digital computing devices with nite precision
and the question arises whether the detection of chaos is affected by this inaccurateness.
Besides, in many cases it is mandatory to apply numerical approximation techniques in
order to obtain any results at all, implying that the immanent inaccurateness is further increased. While no way to overcome this phenomenon can be offered, the section contains
some suggestions for properly interpreting the results of numerical simulations.

A.1. Basic Properties of Linear Dynamical Systems

The following section presents a very short survey of the phenomena observable in linear dynamical systems. This section does not claim to be complete,1 but is intended as a reminder
of the most important dynamic phenomena. It concentrates on those aspects of linear systems which are especially interesting in comparison with analogous nonlinear systems. As
some important qualitative differences exist between continuous-time and discrete-time dynamical systems, they will be presented separately.

A.1.1. Continuous-time Dynamical Systems

Consider an n dimensional, linear, continuous-time, dynamical system with constant coefcients
x 1 (t) = a11 x1 (t) +
x 2 (t) = a21 x1 (t) +
..
.
x n (t) = an1 x1 (t) +

+ a1n xn (t) + c1 ,
+ a2n xn (t) + c2 ,

...
...

...

xi , ij R,

(A.1.1)

+ ann xn (t) + cn ,

with x (t) = dx(t)/dt, or, in vector notation,

t) = Ax(t) + c,
x(

x Rn ,

t R,

(A.1.2)

with A as the n n matrix

11

a12

...

a21

A= .
..

a22
..
.

...

a n1

a n2

...

..

a 1n

a 2n

.. ,
.

(A.1.3)

ann

Extensive treatments of linear dynamical systems with many economic examples can be
found, e.g., in Allen (1963), Chapters 5 and 6, Brock/Malliaris (1989), Gandolfo
(1983), or Takayama (1974). 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 appendix.

250

Appendix

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

Consider rst the simplest case with n = 1 and c = 0, i.e., the homogeneous, one-dimensional differential equation
x (t) = ax(t).

(A.1.4)

Equation (A.1.4) can be solved explicitly, namely2

x(t) = x(0)eat .

(A.1.5)

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

(A.1.6)


x(t) = x(0) x eat + x ,

(A.1.7)

is

where x represents the xed-point value of (A.1.6), i.e., the value of x which solves 0 =
ax(t) + c. If (x(0) x ) = 0, x(t) converges to (diverges from) the xed-point value x if
a < 0 (> 0). In both cases (A.1.4) and (A.1.6), 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. Differentiating
the rst equation with respect to time and substituting for x 2 and x2 leads to
x
1 (t) (a11 + a22 )x 1 (t) + (a11 a22 a12 a21 )x1 (t) = 0.

(A.1.8)

Obviously, the coefcients of x1 and x 1 are the determinant and the negative value of the
trace of the coefcient matrix A = {aij }, i, j = 1, 2, respectively. The solution of (A.1.8) is
given by3
x1 (t) = m1 e1 t + m2 e2 t ,

(A.1.9)

with mi as constants determined by the initial values x1 (0) and x 1 (0), and i as the eigenvalues of A, i.e., the solutions of the equation |A I| = 0, where I is the 2 2-identity
matrix. Thus, the eigenvalues are the solutions of
2 (a11 + a22 ) + (a11 a22 a21 a12 ) = 0.

(A.1.10)

Equation (A.1.10) is known as the characteristic equation. The coefcient of is the negative
value of the trace of A while the absolute expression constitutes the determinant of A. The
2

Writing (A.1.4) as x/x

= a and integrating over time yields ln x = at (recall the logarithmic differentiation). Removing the natural log and considering the integration
constant immediately leads to (A.1.5).

If the eigenvalues are identical, (A.1.9) must be replaced by x1 (t) = (m1 + tm2 )et .

A.1. Basic Properties of Linear Dynamical Systems

A.1.a: Stable Node

A.1.b. Unstable Node

A.1.c: Stable Focus

A.1.d: Unstable Focus

A.1.e: Center

A.1.f: Saddle Point

Types of Behavior in Continuous-Time Dynamical Systems

Figure A.1

251

252

Appendix

roots of (A.1.10) are therefore given by

1,2 =

tr A

(tr A)2 4 det A

.
2

(A.1.11)

Substituting for i , i = 1, 2, in (A.1.9) shows that these eigenvalues determine the dynamical
behavior of the system. Basically, two cases can be distinguished:
i) Real roots: The eigenvalues 1,2 in (A.1.11) are real when the discriminant, i.e., =
(tr A)2 4 det A, is positive or equal to zero. Consider rst 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 nite point (x1 , x
2 ). The point (x1 , x2 ) is called a stable node. If the trace is
positive and both eigenvalues are positive, the trajectory monotonically diverges to + or
, 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 xed point is said to be saddle point stable, i.e., the stable and unstable manifolds which are asymptotes to all trajectories intersect at the xed point. The unstable and
stable manifold of the xed point 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 < 0, the eigenvalues are complex
conjugate,
 i.e., they can be writtenas 1 = + i and 2 = i, with = tr A /2,
=
det A (tr A)2 /4, and i = 1. If the real parts Re i are negative, dampened
oscillations occur such that a nite value will be approached in the limit. This value is
called a stable focus of the system. If Re i 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 to the so-called harmonic oscillator which is
especially important in classical mechanics: if the trace of the coefcient matrix for n = 2
is zero, (A.1.8) is formally identical with
x
1 (t) + 2 x1 (t) = 0,

(A.1.12)

with as the frequency of the oscillations. The solution of (A.1.12) is x(t) = a cos(t + t0 ),
with a > 0 as a constant
depending
on the initial values of x1 and x2 at t0 . In this case,



every initial point x1 (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 xed point.
The different possible types of behavior in two-dimensional continuous-time dynamical
systems are illustrated in Figure A.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 difcult to analyze. Nevertheless, some results exist though it may be difcult to establish the presence of the following necessary and/or
sufcient conditions.
Consider the general system (A.1.1) with n > 2. If all eigenvalues i of (A.1.1), i.e., the
roots of the determinant |A I| = 0, are real and negative, the system converges monotonically toward a nite value of x. If there exists a pair of complex conjugate eigenvalues
k , k+1 , the system oscillates with vanishing amplitude if the real parts of all k C and
the real eigenvalues are negative. In both cases the system is called asymptotically stable.

A.1. Basic Properties of Linear Dynamical Systems

253

If all eigenvalues are real and positive, the system diverges monotonically toward +
or , 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.
When the dimension of the considered dynamical system is high, it will usually be difcult to compute the eigenvalues. Without explicit calculations it will also be difcult to
determine whether the eigenvalues are real or complex. The Routh-Hurwitz criterion is a
convenient tool to establish the asymptotic stability of a xed point, i.e., the negativity of
the real eigenvalues or the real parts of the complex eigenvalues. However, the criterion
does not provide an answer to the question whether the roots are indeed real or complex.4
Consider the characteristic equation written in the form
c0 n + c1 n1 + c2 n2 + . . . + cn1 + cn = 0.

(A.1.13)

The n + 1 coefcients ci , i = 0, . . . , cn are arranged in a Routh matrix in the following way:

start with c1 as the rst upper-left-hand entry and place the coefcients c3 , c5 , etc. in the
same row. All ctitious entries cn+k , k 1, are dened as being equal to zero. The second
row starts with c0 , c2 , c4 , etc. The resulting matrix for the general equation (A.1.13) has
the form

c3

c5

c0 c2

0 c1

0 c0
R=

0 0

. .
.. ..

c7

c4

c6

c3

c5

c2

c4

c1
..
.

c3
..
.

..
.

0
..
.

cn2

cn

0 .

(A.1.14)

The minor matrices of R starting at the upper-left-hand corner are


R1 = c1 ,

R2 =

c1

c3

c0

c2


,

c1

R3 = c0
0

c3

c5

c2

c4 ,

c1

c3

(A.1.15)

etc. to Rn (which is identical with R).

The Routh-Hurwitz criterion states that all real eigenvalues and all real parts of the complex conjugate eigenvalues in (A.1.13) are negative if and only if the determinants of all
the matrices R1 , R2 , R3 , . . . Rn are positive.
As an example, consider the case of a third-order differential equation with the characteristic equation
c0 3 + c1 2 + c2 + c3 = 0.
4

(A.1.16)

If the presence of complex eigenvalues can be excluded, the negativity of the real eigenvalues can be examined with the help of Descartes rule: the eigenvalues are negative when
all coefcients in the characteristic equation have the same sign.

254

Appendix

The Routh matrix R is

c1

c3

R3 = c0
0

c2

0 .

c1

c3

(A.1.17)

The xed point of the underlying third-order differential equation is asymptotically stable
if the determinants of the minor matrices R1 , R2 , and R3 are positive, i.e., if
c1 > 0,
c1 c2 c0 c3 > 0,

(A.1.18)

c1 c2 c3 c0 (c3 ) > 0.

The conditions (A.1.18) and the appropriate conditions for higher-dimensional systems can
be combined and simplied. For example, it can be shown that the conditions (A.1.18) are
equivalent with5
c1 , c2 , c3 > 0

and c1 c2 c0 c3 > 0.

(A.1.19)

There exist variants of the Routh-Hurwitz criterion and also different criteria for establishing the negativity of the real eigenvalues or the real parts of the complex eigenvalues.
Details can be found in Gandolfo (1983), pp. 250ff., and Hahn (1984), pp. 752f.
n=1

n=2

n2

Monotone
Convergence

a<0

det A > 0; 1,2 R;

1,2 < 0

i R;
i < 0 i.

Monotone
Divergence

a>0

det A > 0; 1,2 R;

1,2 > 0

i R;
i > 0 i.

Saddle Point
Stability

impossible

det A < 0; 1,2 R;

1 > 0; 2 < 0

j , k R j, k ;
j > 0; k < 0.

Converging
Oscillations

impossible

det A > 0; 1,2 C;

Re 1,2 < 0

j R; k , k+1 C;
j < 0 Re k < 0

Diverging
Oscillations

impossible

det A > 0; 1,2 C;

Re 1,2 > 0

j R; k , k+1 C;
j > (<) 0; Re k > 0

Steady
Oscillations

impossible

det A > 0; 1,2 C;

Re 1,2 = 0

j R; k , k+1 C;
j = 0; Re k = 0

Dynamic Behavior in Linear Continuous-Time Systems

Table A.1
5

Cf. Gandolfo (1983), p. 250, for details.

255

A.1. Basic Properties of Linear Dynamical Systems

The above mentioned dynamical phenomena in continuous-time, linear, dynamical systems are summarized in Table A.1.

A.1.2. Discrete-time Systems

The possible dynamic phenomena in linear, discrete-time dynamical systems are qualitatively more or less equivalent to the continuous-time case with some important differences
especially in one-dimensional systems. Consider an n-dimensional, linear, discrete-time dynamical system with constant coefcients6
x1t+1 = a11 x1t +

...

+ a1n xn
t + c1 ,

x2t+1 = a21 x1t +

..
.

...

+ a2n xn
t + c2 ,

1
xn
t+1 = an1 xt +

...

(A.1.20)

+ ann xn
t + cn ,

or, in vector notation,

xt+1 = Axt + c,

t Z,

(A.1.21)

with A and c as dened in (A.1.3). Consider again rst the simplest case n = 1 and c = 0.
The solution to the homogeneous rst order equation
xt+1 = axt

(A.1.22)

is found by iterating (A.1.22), i.e., x1 = ax0 x2 = ax1 = a2 x0 , etc., as:

xt = x0 at ,

(A.1.23)

with x0 as the initial value. For example, if x0 > 0, xt increases (decreases) monotonically
for a > 1 (0 < a < 1). If a = 1, xt stays at the initial point for all t.
If c = 0, the solution to the non-homogeneous equation
xt+1 = axt + c

(A.1.24)

xt = (x0 x )at + x ,

(A.1.25)

is

with x as the xed-point value of x, i.e., the value that solves (A.1.24) for xt+1 = xt .
If (x0 x ) = 0, xt converges to (diverges from) its xed-point value monotonically if
0 < a < 1 (a > 1).
If a < 0, a phenomenon arises in both cases (A.1.22) and (A.1.24) 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 dampened and xt approaches a nite value.
6

An introduction to linear difference equations can be found in Goldberg (1958).

256

Appendix

If a < 1, the amplitude of the oscillations increases exponentially such that xt converges
alternatively to + and . 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
x1t+2 (a11 + a22 )x1t+1 + (a11 a22 a12 a21 )x1t = 0.

(A.1.26)

The solution of (A.1.26) is given by7

x1t = m1 1 t + m2 2 t ,

(A.1.27)

with mi and i , i = 1, 2 having the same meaning as in (A.1.9). Depending on the sign
of the discriminant = (tr A)2 4 det A, the eigenvalues 1,2 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 tr A, the eigenvalues i can be positive or negative.
An eigenvalue 0 < i < 1 (i > 1) implies a monotonic convergence (divergence) in one
of the two r.h.s. expressions in (A.1.27). An eigenvalue 1 < i < 0 (i < 1) implies a
converging (diverging) sawtooth oscillation in one of the r.h.s. expressions in (A.1.27). As
both eigenvalues can have the same sign or can be of opposite sign, a variety of possibilities
exists for the linear combination (A.1.27) 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 . For example, if both eigenvalues are positive and smaller than 1 (larger
than 1), the system monotonically approaches a nite value (monotonically diverges). If
the eigenvalue 1 is positive and larger than 1 and if 2 is negative and larger than 1,
the eigenvalue 1 is the dominant root. The system is characterized by vanishing sawtooth
oscillations around a divergent trend for t large.
ii) Complex roots: When the discriminant is negative, the roots can be complex conjugate numbers. The system is characterized by converging oscillations with vanishing amplitudes if the
modulus of the complex eigenvalues is smaller
than 1, i.e., mod i < 1. The modulus of a
complex number = + i is dened by the
Euclidian distance between the origin and the
point
 (, ) in the Gaussian plane, i.e., mod =
2 + 2 (cf. Figure A.2). Simple geometry
implies that
1,2 = i

The Gaussian Plane

Figure A.2

= mod (cos i sin ),

(A.1.28)

with as the angle between the distance line and the real axis. DeMoivres theorem implies
that the solution (A.1.27) can be written in the form8
7

If both eigenvalues are identical, the solution (A.1.27) must be replaced by x1t = (m1 +
tm2 )t .

DeMoivres theorem says that r(cos i sin )

n

= rn (cos n i sin n).

A.1. Basic Properties of Linear Dynamical Systems

xt = m1 t1 + m2 t2 ,

t

= m1 mod(cos + i sin )

257

t

+ m2 mod(cos i sin ) ,

= modt m1 (cos t + i sin t) + m2 (cos t i sin t) ,

t

(A.1.29)

= mod (m1 + m2 ) cos t + (m1 m2 )i sin t ,

= modt (n1 cos t + n2 i sin t).
When 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.
A xed point of a 2-dimensional, discretetime, dynamical system is thus obviously stable when the modulus is smaller than one.
A usual expression in this context is that
the eigenvalues lie in the unit circle (in
the Gaussian plane). Figure A.3 shows this
plane with two different complex conjugate
eigenvalues. The pair with the positive real
part lies outside the unit circle and represents a scenario with an unstable xed
point. The second pair with a negative real
Eigenvalues Inside and Outside
part resides inside the circle and thus has
of the Unit Circle
a modulus smaller than one and depicts a
Figure A.3
scenario with a stable xed point.
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 oscillates. According to the magnitude of the modulus of the complex conjugate eigenvalues and the magnitude of the real eigenvalues the oscillations are exploding or dampened, superimposed
on a converging or diverging trend of the trajectory in dependence on the real eigenvalue.
In the n-dimensional case, it is usually difcult (if not impossible) to calculate the eigenvalues, i.e., the roots of the characteristic equation when n > 3. It is also usually impossible
to determine whether some of the eigenvalues are complex. However, it is (in principle)
possible to provide an answer to the question whether a xed point is stable, i.e., whether
the roots have modulus less than one.
Consider an n-dimensional, linear dynamical system with its characteristic equation
c0 n + c1 n1 + c2 n2 + . . . + cn = 0.

(A.1.30)

The following matrices S1 and S2 are called Schur-matrices:

S1 =

c1

c2

c3

c0

c1

c2

c0

c1

..

cn2

cn3

cn4

..

c0

c1
c0

(A.1.31)

258

Appendix

cn

S2 =

cn1

cn

cn

..
cn

cn1

cn2

..

cn

cn1

c4

c3

cn1

cn2

c3

c2

(A.1.32)

Consider the following minor matrices starting at the upper-left-hand corner of S1 :


S11 = c0 ,

S12 =

c0

c1

c0

c0

S13 = 0

c1

c2

c0

c1 ,

c0

(A.1.33)

etc. to S1n . The analogous minor matrices of S2 starting at the upper-right-hand corner of
S2 are


S21 = cn ,

S22 =

cn

cn

cn1


,

S23 = 0
cn

cn

cn

cn1 ,

cn1

cn2

(A.1.34)

etc. to S2n .
The Schur theorem establishes that all eigenvalues of a linear, n-dimensional, dynamical
system have a modulus < 1 if and only if the following properties are satised:
|S1i + S2i | > 0,
|S1i S2i | > 0,

for i = 1, . . . , n 1,

and
c0 + c1 + c2 + . . . + cn > 0,
c0 c1 + c2 c3 . . . cn > 0.

For example, in the case of a third-order differential equation with the characteristic equation
c0 3 + c1 2 + c2 + c3 = 0,

(A.1.35)

the stability conditions according to Schurs theorem are:

c0 + c1 + c2 + c3 > 0,
c0 c1 + c2 c3 > 0,
|S11 + S21 | = c0 + c3 > 0,
|S11 S21 | = c0 c3 > 0,


 c0 c1 + c3 
|S12 + S22 | = 
 = c0 (c0 + c2 ) c3 (c1 + c3 ) > 0,
c c + c2
 3 0

 c0 c1 c3 
|S12 S22 | = 
 = c0 (c0 c2 ) + c3 (c1 c3 ) > 0.
c3 c0 c2

(A.1.36)

259

A.1. Basic Properties of Linear Dynamical Systems

For n large, applications of this Schur criterion will obviously necessitate extensive computational efforts. Furthermore, when an n-dimensional dynamical system of the form (A.1.20)
is given, the computation of the coefcients ci in the characteristic equation will usually be
difcult and time-consuming.9
n=1

n=2

n2

Monotone
Convergence

0<a<1

1,2 R;
1,2 < 1

i R;
|i | < 1 i

Monotone
Divergence

a>1

1,2 R;
1,2 > 1

i R;
|i | > 1 i

Converging
Oscillations

1 < a < 0
(Sawtooth)

det A > 0; 1,2 C;

mod 1,2 < 1

j R; k , k+1 C;
j < 1 mod k < 1

Diverging
Oscillations

a < 1
(Sawtooth)

det A > 0; 1,2 C;

mod 1,2 > 1

j R; k , k+1 C ;
mod k > 1

Steady
Oscillations

a = 1
(Sawtooth)

det A > 0; 1,2 C;

mod 1,2 = 1

j R; k , k+1 C;
j = 1 mod k = 1

Dynamic Behavior in Linear Discrete-Time Systems

Table A.2
Some important dynamical phenomena in discrete-time, linear dynamical systems are
summarized in Table A.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.

A.1.3. Invariant Subspaces in Linear Dynamical Systems

The invariant subspaces briey outlined in this subsection rely on the notion of an eigenvector associated with an eigenvalue. It is necessary to recall the role of eigenvectors in the
solution of linear dynamical system at some length.10 The presentation concentrates on
the continuous-time case. The analogous subspaces emerging in discrete-time systems are
briey mentioned at the end of the section.

A different version of the Schur criterion can be found in Gandolfo (1983), pp. 112f.
That version requires the calculation of the determinants of up to 2n 2n matrices
which implies an even more extensive computational expense.

10

Extensive treatments of the topics covered in this subsection can be found in Braun
(1978), Gantmacher (1954), and Hirsch/Smale (1974). The following presentation is
inspired by Rommelfanger (1977). Discussions of the topic concentrating on transformation matrices can be found in Guckenheimer/Holmes (1983) and Wiggins (1990).

260

Appendix

Eigenvectors and Solutions of Linear Dynamical Systems

Consider the linear, n-dimensional, homogeneous, dynamical system
x Rn ,

x = Ax,

(A.1.37)

with A as an n n - matrix of constant coefcients. A (fundamental) solution of (A.1.37)

is found by attempting the same approach as in (A.1.5) or (A.1.9):

x1
p1 et
x2 p2 et

= pet ,
x(t) =
... = ...

(A.1.38)

pn et

xn

with p = 0 as a vector of yet unspecied constants. Differentiating (A.1.38) with respect to

time yields

p1 et
p2 et
= pet .
x =
...

(A.1.40)

pn et

Substitution for x and x in (A.1.37) yields

pet
p

=
=

Apet ,
Ap,

(A.1.41)

or
(A I)p = 0.

(A.1.42)

Equation (A.1.42) constitutes the denition of an eigenvector p associated with the eigenvalue
: equation (A.1.42) possesses a non-trivial solution p = 0 only if |A I| = 0, i.e., the
constituent equation for the determination of the eigenvalues of A.
The n n - Matrix A possesses n eigenvalues, some of which might be identical or complex conjugate. Each of these eigenvalues possesses an associated eigenvector. However, the
eigenvectors are determined only up to a multiplicative constant, i.e., if p = (p1 , p2 , . . . , pn )
is an eigenvector associated with an eigenvalue , then p = (cp1 , cp2 , . . . , cpn ) = c(p1 , p2 ,
. . . , pn ) = cp is an eigenvector as well.
Assume that A possesses n (pair wise) different eigenvalues and that the associated eigenvectors are linearily independent. Then (A.1.37) has n different (fundamental) solutions
xj (t) = cj pj ej t ,

j = 1, . . . , n,

(A.1.43)

where the indeterminacy of pj has been expressed by the introduction of the scalars cj .
It has been mentioned in the previous subsections that the general solution of (A.1.37) is
obtained by linear combinations of the n different fundamental solutions, i.e., if (A.1.43)
are solutions of (A.1.37) then
x(t) =

n

j =1

cj pj ej t ,

j = 1, . . . , n,

(A.1.44)

261

A.1. Basic Properties of Linear Dynamical Systems

is also a solution of (A.1.37).
Invariant Subspaces

The eigenvectors described above are used for spanning invariant subspaces of Rn . Consider the n-dimensional system (A.1.37). The eigenvalues i , i = 1, . . . , n, can be divided
into three classes:
Class S: Eigenvalues with negative real parts.
Class U: Eigenvalues with positive real parts.
Class C: Eigenvalues with zero real parts.
The eigenvectors belonging to the eigenvalues in these classes are denoted as pS
h, h =
C
1, . . . , ns , pU
,
k
=
1
,
.
.
.
,
n
,
and
p
,

=
1
,
.
.
.
,
n
,
respectively,
with
n
+
n
+
nc =
u
c
s
u
k

11
n
n. The eigenvectors belonging to a particular class span subspaces in R (also known as
eigenspaces):
Stable Subspace:

S
E S = span{pS
1 , . . . , pns }

U
Unstable Subspace: E U = span{pU
1 , . . . , pnu }

Center Subspace:

(A.1.45)

C
span{pC
1 , . . . , pnc }

The Rn can then be understood as the direct sum of the subspaces E S , E U , and E C :
Rn = E S E U E C .

(A.1.46)

Of course, one or two of the subspaces may be empty in a given dynamical system. The
subspaces represent invariant sets because a trajectory starting in one of the three sets will
stay in that set forever.

A.4.a.

A.4.b.
Examples of Invariant Subspaces in R2
Figure A.4

A.4.c.

Figure A.4 depicts three examples of invariant subspaces in R2 . The dynamical system
underlying Figure A.4.a is assumed to have one real positive and one real negative eigenvalue. The eigenvectors are described by the upper two straight lines in the cross; the
11

If some eigenvectors are not linearily independent the eigenvectors have to be replaced
by so-called generalized eigenvectors. Cf. Braun (1978) for details.

262

Appendix

subspaces are formed by mirroring the lines because the span of the vectors includes multiplication by negative scalars. The example in Figure A.4.a depicts the standard scenario
known as a saddle point. The subspace E C is empty in this example. Figure A.4.b shows an
example with an empty subspace E U . The stable subspace is dened as in Figure A.4.a. The
center subspace is dened by the span of an eigenvector associated with a real eigenvalue
which equals zero. Initial points located in this subspace do not move anymore. Figure
A.4.c depicts a similar same case as in Figure A.4.b with the exception that E S = and a
nonempty unstable subspace.

A.5.a.

Examples of Invariant Subspaces in R3

Figure A.5

A.5.b.

Two examples of subspaces in R3 are depicted in Figure A.5. The case of two negative
real eigenvalues and one positive real eigenvalue (and E C = ) is shown in Figure A.5.a.
The unstable subspace is dened by the vertical line originating in the xed point; the
stable subspace is represented by the shaded plane. Figure A.5.b. contains an example of
a positive real eigenvalue and a pair of complex conjugate eigenvalues with negative real
part.
The eigenspace belonging to the complex eigenvalues is spanned by the real part, pR ,
and the imaginary part, pI , of the eigenvector. This can be explained by the following
consideration: When an eigenvalue is complex the associated eigenvector and the solution
x(t) = cpet are complex as well. However, the complex solution x(t) denes two real
solutions: Differentiating the general form of the solution, i.e., x(t) = y(t) + iz(t), with
respect to time and substituting into (A.1.37) yields
x
= Ax,
y + iz = A(y + iz).

(A.1.47)

As the real and imaginary parts on both sides of the equation must be identical, it follows
that y = Ay and z = Az. Thus, y and z are (real) solutions of (A.1.37). The explicit form
of the solutions is12

2

y(t) = et pR cos t pI
t

z(t) = e
12

I 2

p sin t + p
R


sin t ,

(A.1.48)

cos t .

Cf. Braun (1978), Chapter 2.2.1, for details on the derivation of eit = cos t + i sin t.

A.1. Basic Properties of Linear Dynamical Systems

263

Thus, the solutions y(t) and z(t) are dened on a plane spanned by the real part pR and
the imaginary part pI of the complex eigenvector p associated with a complex eigenvalue
= + i . The conjugate eigenvalue and the associated eigenvector imply the same results
with appropriate negative signs; the subspace is nevertheless unaltered because the negative
axes are already included in the span of the previously derived vectors.
The case of discrete-time, linear, dynamical systems can be treated in a similar manner.
Consider the n-dimensional system
xt+1 = Axt ,

x R,

(A.1.49)

and A dened as above. Assume again that there exist n different eigenvalues of A. The
fundamental solution of (A.1.49) for an initial value x0 is
xt = A t x0 .

(A.1.50)

The relevance of eigenvectors cannot be seen as easily as in the continuous-time case. Consider the diagonal matrix L dened as

1
0
L=
...

0
2
..
.

...
...
..
.

...

0
0
.
..
.

(A.1.51)

The matrices A and L are similar if there exists a transformation matrix P with the property
det P = 0 and
L = P1 AP.

(A.1.52)

Assume that such a matrix P exists. Then (A.1.52) can be written as

PL = AP.

(A.1.53)

The diagonal form of L implies that (A.1.53) can also be written as

i pi = Api ,

i = 1, . . . , n,

(A.1.54)

or
0 = (A i I)pi ,

i = 1, . . . , n,

(A.1.55)

with pi as the ith column vector of the matrix P. Equation (A.1.55) is the constituent
equation for the eigenvector pi associated with the eigenvalue i . Thus, the eigenvectors
pk , k = 1, . . . , n represent the kth columns of the transformation matrix P. With A t =
PLt P1 , the fundamental solution (A.1.50) can be written as
xt = PLt P1 x0 .

(A.1.56)

As L is a diagonal matrix, the matrix Lt can be calculated by simply exponentiating the

entries i .

264

Appendix

The invariant subspaces can be determined by categorizing the eigenvalues in a way

analogous to the case of continuous-time systems:
Class S: Eigenvalues with modulus less than 1.
Class U: Eigenvalues with modulus greater than 1.
Class C: Eigenvalues with modulus equal to 1.
The denition of the invariant subspaces is identical with the denition provided above for
the case of continuous-time systems (cf. (A.1.45)).

A.2. Center Manifolds and the Reduction of (Effective) Dimensions

In diverse sections of the main text various dynamical systems with a particular dimension
have been studied. When an n-dimensional system was investigated, a mathematical result
dened for such an n-dimensional system was applied to it. For example, most types of bifurcations in Sections 3.2 and 3.2 of the main text were discussed in a one- or two-dimensional
context with the appropriate theorems formulated for the one- or two-dimensional case,
respectively. While many theorems mentioned in this chapter can be extended to the ndimensional case, severe analytical problems are usually involved when systems with more
than two or three state variables are considered. Besides, some theorems (like the Hopfbifurcation theorem for discrete maps) are restricted to the case of a particular dimension.
It would thus be desirable if methods existed that allow for a reduction of the effective dimension of a given n-dimensional dynamical system, i.e., to investigate a system with a dimension
m < n which nevertheless provides sufcient information on the dynamics of the original
n-dimensional system.
A particular method for the reduction of the dimension of a given system has been described in Chapter 2 in the context of relaxation oscillations. This method, not uncommon
in economics, usually relies on variations in assumed adjustment coefcients and thus on
fundamental changes of the nature of the dynamical system under investigation. Another
method consists in applying the center manifold theorem to be described below. Basically, applications of this theorem require that the dynamical system under investigation is available
in a precise algebraic form; dynamical systems in general forms like x = f (x) with f described qualitatively cannot be investigated with the help of the center manifold theorem.
While such general formulations dominate economic dynamic models, the method should
nevertheless be outlined in the following for two reasons: First, in a few examples precise
algebraic forms are indeed available in economic dynamic systems; second, in all economic
examples (including the graphical examples) it has implicitly been assumed that such a
precise formulation is (in principle) possible. It should, however, be kept in mind that
a center manifold can only be calculated for given algebraic forms of a system and that
generalizations of the results are inappropriate.
The concepts of stable, unstable, and center manifolds have already been mentioned
in Section 2.1 in the context of the equivalence between the local behavior of a nonlinear
dynamical system and the associated linearized system. It has also been mentioned that
the local behavior of a nonlinear dynamical system cannot be described with the help of
its associated linear system when a xed point is not hyperbolic, i.e., when one or several
eigenvalues are equal to zero or have zero real parts (or have a modulus equal to one in the
discrete-time case).13 However, all bifurcation types described in the previous sections deal
13

Recall that nonlinear dynamical systems would not be really interesting if their local
behavior could entirely be described by the behavior of the associated linear system.

A.2. Center Manifolds and the Reduction of Dimensions

265

with situations in which eigenvalues take on these values. It follows that the characteristic
local behavior of nonlinear dynamical systems is related to this case of zero real roots or
purely imaginary roots (or roots with modulus 1 in the discrete-time case). As this chapter
concentrates on local bifurcations with the described properties of the eigenvalues, take the
scenario with zero real roots etc. for granted and assume that an n-dimensional, nonlinear,
dynamical system of the general form
x = f(x),

x Rn ,

(A.2.1)

can be written as
y = Ay + g(y, z),
z = Bz + h(y, z),

y Rc ,

z Rs ,

c + s = n.

(A.2.2)

The matrix A is a c c - matrix with real eigenvalues equal to zero (or purely imaginary
eigenvalues); the matrix B is an ss - matrix with negative real eigenvalues (or negative real
parts of complex eigenvalues).14 In the formulation (A.2.2) it has implicitly been assumed
that the unstable manifold (and the unstable eigenspace) is empty. The center manifold
theorem guarantees15 that a center manifold for (A.2.2) exists but that it may not necessarily
be unique.
As a motivation for the concentration on center manifolds consider Figures A.6 and A.7. In
Figure A.6 it has been assumed that the dynamical system is two-dimensional and that it possesses a negative real eigenvalue and a zero real
eigenvalue. The negative real eigenvalue implies that the motion of the system is dominated
by a convergence toward the center manifold.
If the dynamical system starts at initial points
which are located further away from the center manifold the presence of the stable manifold
guarantees that trajectories will eventually converge toward the center manifold. Figure A.7 depicts the case of a three-dimensional system with
a one-dimensional stable manifold and a twodimensional center manifold derived from comStable and Center Manifolds
plex conjugate eigenvalues with zero real parts.16
of a 2D System
Once again, the motion in a distance of the cenFigure A.6
ter manifold is dominated by the stable manifold
and trajectories converge toward the center manifold. Thus, it can be suspected that in the
cases of Figures A.6 and A.7 the motion of the system is eventually dominated by the center
manifold.
Suppose the center manifold can be described by an equation system of the form
z = k(y).

(A.2.3)

14

Compare Section 2.1 for this procedure.

15

Cf. Guckenheimer/Holmes (1983), p. 127.

16

Compare the discussion in the appendix A.1.3 for a description of the appropriate
eigenspaces.

266

Appendix

A One-Dimensional Stable Manifold and a Two-Dimensional Center Manifold

Figure A.7
There exist theorems17 saying that the local dynamic behavior of (A.2.2) is equivalent to
the behavior of

y = Ay + g y, k(y) .

(A.2.4)

If one succeeds in deriving the proper expression for z = k(y) it is thus possible to study
the local behavior near the xed point with the help of a c < n dimensional dynamical
system.
The problem remains to calculate the specic form of (A.2.3) for a given dynamical
system (A.2.1).18 Differentiating (A.2.3) with respect to time yields
z = Jk y ,

(A.2.5)

with Jk as the Jacobian matrix of rst-order derivatives of the vector-valued function k. The
above-mentioned theorems establish that the dynamics of the original system (A.2.2) eventually takes place on the center manifold; thus the original dynamics can be described by
the system

y = Ay + g y, k(y) ,

z = Bk(y) + h y, k(y) ,

y Rc ,

z Rs .

(A.2.6)

Substituting (A.2.6) into (A.2.5) yields



Bk(y) + h y, k(y) = Jk Ay + g y, k(y)

17

18

(A.2.7)

Cf. Carr (1981). More detailed information can be obtained from Arrowsmith/Place
(1990), pp. 93ff., Guckenheimer/Holmes (1983), pp. 127ff., and Wiggins (1990), pp.
195ff.
The following procedure is described in detail in Wiggins (1990), pp. 195ff.

267

A.2. Center Manifolds and the Reduction of Dimensions

or



Jk Ay + g y, k(y)

Bk(y) h y, k(y) = 0.

(A.2.8)

A procedure for calculating (A.2.3) with any desired degree of precision is described in
Guckenheimer/Holmes (1983), pp. 131f.: Assume that the manifold (A.2.3) can be approximated by polymomials of the form
z = k(y) = a2 y2 + a3 y3 + a4 y4 + . . . + aj yj + O(yj +1 ).

(A.2.9)

The expression O(yj +1 ) includes all terms with powers greater than or equal to j + 1. In
many cases it sufces to consider only powers of 2 and 3 in approximations of (A.2.3).
Substituting (A.2.9) in (A.2.8) yields polynomials with powers of 2 and greater. The unknown coefcients ai , i = 2, 3, . . ., are found by equating the coefcients of all expressions
of the same power. Substitution of the resulting equation z = k(y) with the proper coefcients into (A.2.4) yields the desired dynamical system dened on the center manifold.
The following simple example of a two-dimensional system illustrates the procedure
outlined above for the general n-dimensional case.19 Consider the system
x = x2 y x5 ,

x, y R.

y = x2 y,

(A.2.10)

The system has a xed point at the origin. The Jacobian, evaluated at the origin, is
J |(x,y)=(0,0) =

0
0
,
0 1

(A.2.11)

implying that the eigenvalues are 1 = 0 and 2 = 1. Thus, the xed point (0, 0) is
non-hyperbolic.
Writing (A.2.10) in the form (A.2.2) yields
x = 0 + x2 y x5 = 0 + g (x, y ),

(A.2.12)

y = y + x2 = y + h(x, y ).

The center manifold of (A.2.12) is a one-dimensional curve tangent to the linear center
eigenspace y = 0, i.e., the x-axis, at the origin. The particular form of (A.2.8) for this
example is



Jk 0 x + g x, k(x)

(1)k(x) h x, k(x) = 0,

Jk x2 k(x) x5 + k(x) x2 = 0.

(A.2.13)

When the manifold is approximated by

k(x) = a2 x2 + a3 x3 + O(x4 ),
19

The example is described in detail in Wiggins (1990), pp. 196f.

(A.2.14)

268

Appendix

(A.2.13) turns into

2a2 x + 3a3 x2 + . . .



x2 (x5 + a2 x2 + a3 x3 + . . .)

x2 + a2 x2 + a3 x3 + . . . = 0.

(A.2.15)

Equation (A.2.15) can be rearranged as an equation of the form

b2 x2 + b3 x3 + b4 x4 + . . . = 0.

(A.2.16)

The equation is fullled when all coefcients bi , i = 2, 3, . . . , equal zero. For (A.2.15) this
implies that a2 1 = 0 and a3 = 0. Thus, the center manifold is approximated by
y = k(x) = 1 x2 + 0 x3 + O(x4 ) = x2 + O(x4 ).

(A.2.17)

The motion on the center manifold is described by20

x = x2 k(x) x5 = x2 x2 + O(x4 ) x5 ,

= x4 + O(x5 ).

(A.2.18)

Equation (A.2.18) is a simple one-dimensional equation. The eigenvalue at the origin still
equals zero but the stability property of the origin can now be determined by a simple
argument. For all x(0) = 0 in a neighborhood of the origin x is positive. Thus, the origin
is unstable (half-stable) in the sense that for x(0) < 0 the trajectory converges toward
the origin and that for x(0) > 0 the trajectory diverges from the origin. As the dynamic
behavior of the original system (A.2.10) can locally be represented by the reduced system
(A.2.18), the origin of (A.2.10) is unstable as well.
Center manifolds for discrete maps of the form
xt+1 = f(xt ),

x Rn ,

(A.2.19)

can be derived in a way very similar to the procedure outlined above. The system (A.2.19)
can be written as
yt+1 = Ayt + g(yt , zt ),
zt+1 = Bzt + h(yt , zt ),

(A.2.20)

where A and B have the same properties as in (A.2.2). The procedure for the determination
of the reduced system on the center manifold is identical with the case outlined above with
the exception that the equation analogous to (A.2.8) or (A.2.13) has to be calculated as
follows. Substitution of z = k(y) in (A.2.20) yields

yt+1 = Ayt + g yt , k(yt ) ,

zt+1 = Bk(yt ) + h yt , k(yt ) = k(yt+1 ).

20

(A.2.21)

The reader will notice that in this particular example the differential equation (A.2.18)
can also be determined by a simple substitution: consider the case y = 0 in (A.2.10)
and substitute the resulting y = x2 in the rst equation of (A.2.10). However, in most
other examples the procedure described above has to be applied in order to derive the
laws of motion on the manifold.

A.2. Center Manifolds and the Reduction of Dimensions

269

Substituting yt+1 from the rst equation of (A.2.21) into the r.h.s. of the second equation
and rearranging terms yields



k Ayt + g yt , k(yt )

Bk(yt ) h yt , k(yt ) = 0.

(A.2.22)

The rest of the procedure is identical with the procedure outlined for continuous-time
systems.
Many dynamical systems include one or more parameters. Indeed, the entire Chapter
3 deals with situations in which a parameter is changed and the topological nature of the
solution curves changes when the parameter takes on a particular value. The question
arises whether center manifolds can be derived for this case as well. This can in fact be
done when the parameters are treated in a particular way. Let be a p-dimensional vector
of parameters. A parameter-dependent dynamical system of the general form
x Rn , Rp ,

x = f(x, ),

(A.2.23)

can be rewritten as
y = Ay + g(y, z, ),
z = Bz + h(y, z, ),

(y, z) Rc Rs ,

c + s = n,

Rp .

(A.2.24)

The center manifold of (A.2.24) can be determined when the parameters are interpreted
as dynamic variables with = 0. The system
y = Ay + g(y, z, ),
z = Bz + h(y, z, ),
= 0,

(y, z) Rc Rs ,

c + s = n,

Rp .

(A.2.25)

will be treated as an c + s + p dimensional system which has c + p zero real eigenvalues or

eigenvalues with zero real part. The center manifold of (A.2.25) is represented as a graph
of the variables with associated zero real eigenvalues, i.e., over y and . The analogous
expression of (A.2.3) in this case is
z = k(y, ).

(A.2.26)

Performing the same procedure as above in (A.2.5) - (A.2.8) yields



Jk,y Ay + g y, k(y, ),

Bk(y, ) h y, k(y, ), = 0,

(A.2.27)

with Jk,y as the matrix of partial derivatives of k(y, ) with respect to k and . In the calculation of (A.2.27) it has been made use of the fact that = 0. The rest of the procedure is
identical with the one outlined above. Center manifolds for parameter-dependent discretetime maps can be derived analogously.
The consideration of parameters in (A.2.23) implies that the dimension of the center
manifold is increased by the dimension of the vector of parameters, p. All solution curves
in a small neighborhood of the xed point are contained in this manifold. Thus, when a
single parameter p takes on a bifurcation value, the bifurcating solution curve for a slightly
changing parameter is contained in the center manifold as well.

270

Appendix

A.3. A Brief Introduction to the Theory of Lags and Operators

Economic dynamics deals with models that contain at least one equation of the general
form
yt = f (xt1 , xt2 , . . . , xtm ),

(A.3.1)

with x Rn as a vector of variables. The vector can contain y , i.e., the variable under
consideration. The examples mentioned in the main text include investment functions,
price expectation hypotheses, etc. Most models in economic dynamics deal with very simple
lag structures in the form of, e.g.,
yt = f (yt1 , xt1 ),

(A.3.2)

with y, x R or
yt = f (xtT ),

(A.3.3)

with y, x R, T 1. When the value of the (dependent) variable yt depends on the value
of x delayed by a constant number of periods the system is said to posses a constant lag.
In addition to these simple constant lags, several different lag structures are occasionally
assumed in models of economic dynamics.21 The majority of economic examples can be
found in models with learning behavior. In order to simplify the exposition, the dependence of a variable yt on its past values will be omitted in the sequel.
Discrete Time
In discrete-time models, the distributed lag belongs to the most common lag structures. A
lag is called a distributed lag when the value of a variable Yt is a weighted average of the n
past values of another variable X :
Yt = 1 Xt1 + 2 Xt2 + . . . + n Xtn ,

(0, 1),

n


i = 1.

(A.3.4)

i=1

The geometric lag represents a special form of distributed lags:

Yt = (1 )(Xt1 + Xt2 + 2 Xt3 + . . . + n Xtn1 ),

(0, 1).

(A.3.5)

The sum of the coefcients constitutes a geometric sum and converges toward 1 for n ,
i.e.,
lim (1 )

21

n


i = 1.

(A.3.6)

i=0

Extensive discussions of different types of time lags can be found in Allen (1963), pp.
23ff., and Koyck (1954).

A.3. An Introduction to the Theory of Lags

Types of Lags

Formal Description

Constant Lag

Yt = XtT ,

Distributed Lags

general
Yt = 1 Xt1 + 2 Xt2 + . . . + n Xtn ;
(0, 1),

271

T N

%n

i=1 i

=1

geometric
Yt = (1 )(Xt1 + Xt2 +

+2 Xt3 + . . . + n Xtn1 ),
(0, 1)
Types of Time Lags in Discrete-Time Dynamical Systems
Table A.3
The presence of geometrically distributed lags has a consequence which is used in some
models discussed in the main text.22 Consider the equation
Yt = (1 )(Xt1 + Xt2 + 2 Xt3 + . . . + n Xtn1 ).

(A.3.7)

Substituting t 1 for t and multiplying the equation with yields

Yt1 = (1 )(Xt2 + 2 Xt3 + 3 Xt4 + . . . + n+1 Xtn2 ).

(A.3.8)

Subtraction of (A.3.7) from (A.3.8) yields

Yt Yt1 = (1 )(Xt1 n+1 Xtn2 ).

(A.3.9)

For n large, the expression n+1 Xtn2 converges toward 0 because is smaller than 1.
Re-arranging terms yields
Yt Yt1 = (1 )(Xt1 Yt1 ).

(A.3.10)

The geometric lag (A.3.7) results in a linear, rst-order, difference equation in the variable
Y .23
Continuous Time
When a model is formulated in continuous time, basically the same lag structures as in
the discrete-time case can be assumed. Table A.4 contains the forms of the constant and
22

Compare Koyck (1954), pp. 22, for the following.

23

A well-known economic example of equation (A.3.10) is provided by the hypothesis of

adaptive price expectations, i.e., pet = (pt1 pet1 ), > 0.

272

Appendix

continuously distributed lags in continuous-time models. The time indices t, T , and are
non-negative real numbers.

Types of Lags

Formal Description

Constant Lag

Y (t) = X (t T ),

Continuously Distributed Lags

General Case

Y (t) =


0

T R

f ( )X (t ) d ;

f ( ) d = 1

Exponential Lag
Y (t) =


0

e X (t ) d ;

d = 1

Types of Time Lags in Continuous-Time Dynamical Systems

Table A.4
The presence of an exponentially distributed lag allows a similar transformation like the
one described above for discrete-time systems.24 Consider the exponential lag


Y (t) =

e X (t ) d.

(A.3.11)

Replacing t with x yields


Y (t) =

(tx)

X (x) dx = e

ex X (x) dx.

(A.3.12)

Differentiation of (A.3.12) with respect to t yields

t

Y e

+ Y e

d
=
dt




x

X (x) dx

= et X (t).

(A.3.13)

It immediately follows that

Y = (Y X ),

(A.3.14)

i.e., an ordinary rst-order differential equation in Y . In other cases, similar differential

equations can be derived from a continuous lag with the help of the Laplace transformation.25
24

Cf. Allen (1963), pp. 26f.

25

Cf. Allen (1963), pp. 155ff.

273

A.3. An Introduction to the Theory of Lags

The Use of Operators
Occasionally, differential equations like (A.3.14) are written as
DY = (Y X ),

(A.3.15)

with D = d/dt as the differential operator. In the main text, a difference like xt xt1 is
sometimes abbreviated as xt with as the difference operator. Another operator is the shift
operator E which shifts a variable yt to the next period:
Eyt yt+1 .

(A.3.16)

The advantage of the use of operators consists in the fact that they can (with some restrictions) be treated as variables that follow the standard rules of algebra. In particular, when
O denotes one of the three operators D, , or E , the rules
commutative : O2 + O
associative :
distributive :

OO2
O(O + 1)

O + O2

O2 O

(A.3.17)

O +O

apply for the operators. The rules do not apply for combinations of the operators with
other variables.26 In the following, a few examples will demonstrate the usefulness of the
introduction of operators in investigating dynamical systems.
a) Operators in Discrete-time
The shift operator E is particularly well-suited to demonstrate the advantages of the use of
operators. With the rules of algebra mentioned above it is possible to transform (A.3.16)
into
yt = E 1 yt+1 ,

(A.3.18)

with E 1 as the shift of the variable yt+1 into the previous period. Obviously, the statement
implied by (A.3.16) is preserved by this algebraic operation. A dynamic relation like
yt+2 = ayt

(A.3.19)

can thus be written as

yt+2 = Eyt+1 = E 2 yt = ayt ,

(A.3.20)

yt = aE 2 yt ayt2 .

(A.3.21)

or

It is simple to derive the relation between the shift operator E and the common difference
operator :
yt yt yt1 ,

= Eyt1 yt1 = (E 1)yt1 = E 1 (E 1)yt =

26

E1
yt .
E

Cf. Allen (1963), pp. 725ff., for a discussion of the allowed operations.

(A.3.22)

274

Appendix

Thus, the relation between the two operators is

=

E1
E

or E =

1
.
1

(A.3.23)

In order to examine the correctness of this result consider the difference equation
yt = yt yt1 = ayt1 .

(A.3.24)

Substituting for yields

E1
yt
E
(E 1)yt
Eyt yt
yt+1 yt

= ayt1 ,
= aEyt1 ,
= aEyt1 ,
= ayt .

(A.3.25)

Replacing t by t 1 immediately yields (A.3.24).

The following example uncovers that operators can be particularly useful in models with
specic lag structures. Consider the geometric lag (A.3.7) and let Yt = pet and Xt = pt .
The equation can then be interpreted as a price expectation hypothesis with pt as actual
prices in t and pet as the prices expected to prevail in period t. With the help of the shift
operator E , the hypothesis can be written as
pet = (1 )(pt1 + pt2 + 2 pt3 + . . . + n ptn1 ),

= (1 ) E

pt + E

pt + E

pt + . . . + E

n1


pt ,

(A.3.26)

= (1 )E 1 0 E 0 + 1 E 1 + 2 E 2 + . . . + n E n pt ,
with (0, 1).
The expression in parentheses is a geometric sum, implying that (A.3.26) can be written
as
pet

= (1 )E

n E n 1
E 1 1

pt .

(A.3.27)

pt .

(A.3.28)

For n , (A.3.27) converges toward

pet = (1 )E 1

1
E 1 1

because of < 1. Equation (A.3.28) can be transformed by using the above mentioned
algebraic rules for the operator:
(E 1 1)pet = (1 )E 1 pt ,
E 1 pet pet = (1 )E 1 pt .

(A.3.29)

Expanding the operator yields

pet1 pet = (1 )pt1 .

(A.3.30)

A.3. An Introduction to the Theory of Lags

275

Re-arranging terms leads to

pet pet1 = (1 ) pt1 pet1 ,

(A.3.31)

i.e., the standard presentation form of adaptive expectations with < 1. This is not very
surprising after the calculations in (A.3.7) (A.3.10) but the example shows that a straight
application of operators in a given system allows for the derivation of interesting results.
b) Operators in Continuous Time
In continuous-time systems, basically the same results as in the previous section can be derived. For example, it is permitted to perform the following operation with the differential
equation (A.3.15):
(D + )Y = X

Y =

X.
D+

(A.3.32)

This representation of the underlying exponential lag structure is useful because it allows
for a denition of more complicated exponential lags. The the so-called multiple exponential
lag is dened as


Y (t) =

n
D + n

n
X (t),

(A.3.33)

with n as a natural number dening the degree of the exponential lag. For n = 1, the
resulting lag (A.3.32) can be called a simple exponential lag.
The exponential term in (A.3.33) converges toward eD for n . The expression
acts like a shift operator E 1 described above in the context of discrete-time systems and
decreases the time argument t by 1:27
Y (t) = eD X (t) = X (t 1).

(A.3.34)

Though t in (A.3.34) is a real variable, it is possible to measure time only in equidistant intervals. When the time interval between two measurements is t = 1, (A.3.34) is equivalent
with a standard, discrete-time, one-dimensional dynamical system.
Sparrow (1980) has demonstrated that the differential equation system

x 1 = n f (xn ) x1 ,
x 2 = n(x1 x2 ),
..
.
x n = n(xn1 xn ),

(A.3.35)

can be written as


xn =
27

n
D+n

n
f (xn ),

Cf. Yosida (1984), pp. 74ff.

(A.3.36)

276

Appendix

i.e., the system implicitly inhibits a multiple exponential lag structure. For n the
exponential term converges toward eD . Equation (A.3.36) turns into
xn = f (xt1 ),

(A.3.37)

for n , i.e., an ordinary one-dimensional difference equation. An intensive discussion

of this relation between continuous-time and discrete-time dynamical systems is contained
in Invernizzi/Medio (1991) and Medio (1991a).

A.4. Numerical Simulations and Chaotic Dynamics in Theoretical Economics

The detection of chaotic dynamics and other phenomena in nonlinear dynamical systems
could not have been possible without the availability of fast electronic computing devices.
However, the wide interest in the behavior of these nonlinear systems was initiated not only
by the advances made in the hardware equipment but also by the availability of complete
software libraries and easy-to-use packages, relieving the end-user from endless struggles
with implementations of sophisticated numerical algorithms. Though it is always wise to
look behind the scenes when a particular algorithm is chosen from a software package it
is probably true that an end-user cares less about the working of a program than someone
who implements an algorithm for himself. Algorithms for the computation of a particular
mathematical task differ in speed, accuracy, controllability, etc., and in many cases a simple
algorithm approximates the mathematically correct result with sufcient precision within
a reasonable amount of time. When the numerical results are unsatisfactory, at least some
qualitative properties like the convergence of a root-nding algorithm to any solution may
be observed.
Nonlinear dynamical systems can be different. Many examples of dynamical systems
introduced in the main text lack an entirely analytical treatment such that a numerical simulation of the system appears to be helpful in understanding its dynamic behavior. Usually,
the simulator is not interested in the particular value of an endogenous variable at a certain point in time but in the global behavior of the system and the geometric shape of an
attractor (if it exists), i.e., the simulator focuses on the qualitative behavior of a dynamical
system. The observed behavior in a simulation might, however, depend on the underlying
particular algorithm in a crucial way. This is especially relevant in the numerical integration
of nonlinear, continuous-time dynamical system.
The potential relevance of the assumption of continuous-time dynamical systems in economics has been stressed occasionally in the course of the book. As the analytical solution
of a differential equation (or systems of which) can be found only in exceptional cases,
numerical integration techniques are mandatory in the inspection of a systems behavior.
However, a time continuum cannot be constructed on a computing device with a nite
precision. Thus, the true solution of a dynamical system can only be approximated by calculating the values of the endogenous variables in nite (possibly variable) time steps.28
No numerical algorithm is able to calculate the true value of a variable at all points in (ctitious) time but on average the differences between calculated and true values may cancel
out. On the contrary it may be possible that the calculated solution has nothing in common with the true solution. This can also be the case for discrete-time dynamical systems
where no specic algorithm for calculating the solution is necessary but where the immanent inaccurateness of the computing device can have identical consequences. Regarding
28

Compare, e.g., Parker/Chua (1989), Chapter 4, for a discussion of local and global
errors in different integration algorithms.

A.4 Numerical Simulations and Chaotic Dynamics

277

chaotic dynamical systems, the problem initiated by numerical simulations is obvious: when
a systems trajectory depends sensitively on initial conditions, the exponential divergence of
two true trajectories is amplied by the repeated incorrectness of the numerical algorithm.
Thus, it might be possible that the simulated trajectory does not reect the inuences of
the systems nonlinearities but represents a ctitious evolution as a consequence of the restrictions in digital, nite-precision computing devices.
If someone who is interested in the dynamic behavior of a given nonlinear system nevertheless decides to simulate the system numerically, the choice of the algorithm deserves particular attention. For example, assume that the following three-dimensional, continuoustime dynamical system should be simulated:29

y 1 = 80.5 0.1 (y1 2.8)3 + 0.4 (y1 2.8) + 1.0 y2 ,



y2
y 2 = 0.5 y1
,
ln (1.0 + arctan y3 )

(A.4.1)

y 3 = 0.1 (1 + y3 )2 (y1 2.0 arctan y3 ),

and that the search is for chaotic dynamics. The number of computer runs with varying
coefcients necessary to encounter chaotic behavior suggests a fast algorithm with a not too
small time step. The object in Figure A.8 represents a projection of the calculated points
(y1 , y2 , y3 ) of (A.4.1) in phase space as calculated by the Runge/Kutta algorithm onto the
y1 -y2 plane. This is a xed step-size algorithm without error correction and it is certainly the
most popular integration algorithm.30 The object consists of 15000 calculated points with
a time step of 0.05 time units.31 The complexity of the object together with its observable
structure indicates the potential presence of chaos. Indeed, the largest Lyapunov exponent,
calculated from the generated time series with the Wolf et al. (1985) method32 is strongly
positive. One has to conclude that simulating (A.4.1) with the Runge-Kutta method yields
chaotic trajectories.
As was pointed out above, different algorithms can imply different qualitative results.
Figure A.9 shows the object generated by simulating equation (A.4.1) with the same coefcients as in the previous simulation but with the Adams/Gear method instead.33 The
Adams/Gear method is a variable-step-size algorithm with error correction34 which generally leads to more accurate results but which is typically slower than the Runge/Kutta
method. The observable object is not quite a single, closed orbit but the wide attractor of
Figure A.8 has shrunk to negligible noise. The evidence of chaos derived from the consideration of Figure A.8 has disappeared by using a different algorithm.
The lesson from this simple example is obvious and can be summarized in the following
principle:
29

30

This example has not been constructed on an ad hoc basis for the purpose of this section. Similar dynamical systems emerge in the context of simultaneous price-quantity
adjustment processes. Cf. Lorenz (1992a) for a discussion of a specic process of this
kind.
Cf. Hairer/Nrsett/Wanner (1987), pp. 130ff., for an intensive discussion of various
Runge/Kutta and alternative methods.

31

This time step does not appear to be too large when it is taken into account that the
system can be interpreted as a discrete-time system when the time step is 1.0.

32

Compare Section 6.2.4. for the denition of Lyapunov exponents.

33

Cf. Hairer/Nrsett/Wanner (1987), pp. 347ff.

34

The absolute and relative error allowances were chosen to be 0.1 105 .

278

Appendix

Y2

Y1

The Simulation of (A.4.1); 4th-order Runge-Kutta Method

Figure A.8

Y2

Y1

The Simulation of (A.4.1); Variable Step-Size Adams/Gear Method

Figure A.9

279

A.4 Numerical Simulations and Chaotic Dynamics

Principle: Never trust a single numerical simulation of a nonlinear continuous-time dynamical system.

These remarks may appear to be in contrast with the numerical robustness of the often
quoted attractors of the prototype systems like the Lorenz or Rossler systems. The fact that
their global behavior seems to be robust with respect to different integration techniques can
indeed be considered as evidence for the presence of chaos in the true solution. However,
the researcher who investigates the dynamic behavior of a genuinely new system can only be
advised to check the behavior of that system with as many as possible or available algorithms,
keeping in mind that even the application of a larger number of different algorithms to
a seemingly chaotic system does not constitute a denite numerical proof of chaos in the
true system.
The differences in the dynamic behavior of
the differential equation system in the example
mentioned above are due to the use of different integration techniques which in themselves
always constitute discrete approximations of a
continuous-time process. On a rst glimpse it
might seem that genuine discrete-time systems
behave quite robust when they are simulated on
digital computers. However, consider the socalled doubling map (A.4.2), i.e., the map that assigns only the fractional part of 2xt to the value
xt+1 in the next period.35 Figure A.10 shows the
graph of the map with its two pieces consisting
of straight lines with a slope of 2. The map is dened on the interval (0, 1] and maps the interval
onto itself. The trajectory outlined in the gure
depicts a period-three cycle. Thus the prerequiFigure A.10
sites of the Li/Yorke theorem are fullled and
chaotic motion prevails in the sense of that theorem. The Lyapunov exponent of
xt+1 = 2x mod 1

(A.4.2)

is calculated as L = log2 (2N )/N = log2 2 = 1, i.e., there exists a sensitive dependence on
initial conditions. There is no immediate reason to expect anything else than a conrmation
of this analytical result in a numerical simulation.
Nevertheless, numerical simulations of (A.4.2) typically yield oscillatory (and occasionally complex) behavior within the rst iterations and an eventual jump to the xed point
(x = 0.0). If one concentrates only on the simulations, one has to conclude that the
dynamic behavior of (A.4.2) is far from being chaotic.
The reason for this divergence of the numerical simulations and an analytic consideration can be found in the immanent features of digital computers. Basically, two storage
properties can be made responsible for the results.
1. The orbit in Figure A.10 constitutes a period-three cycle. A numerical example of such
an orbit is given by the sequence 4/7, 1/7, 2/7, 4/7, . . . All three components of this
cycle represent rational numbers with innitely many digits following the period. However, the standard oating-point arithmetic on digital computers considers only a nite
35

Cf. Devaney (1992) for a more detailed description of this map and its dynamic behavior.

280

Appendix
Period

True
Values

Calculated
Values

1
2
3
4
5
..
.

4/7
1/7
2/7
4/7
1/7
..
.

0.5714286
0.1428572
0.2857144
0.5714288
0.1428576
..
.

18
19
20
21
22
23
24
25

2/7
4/7
1/7
2/7
4/7
1/7
2/7
4/7

0.2890625
0.5781250
0.1562500
0.3125000
0.6250000
0.2500000
0.5000000
0.0000000

Period

True
Values

Calculated
Values

1
2
3
4
5
..
.

0.6
0.2
0.4
0.8
0.6
..
.

0.6000000
0.2000000
0.4000001
0.8000002
0.6000004
..
.

17
18
19
20
21
22
23
24

0.6
0.2
0.4
0.8
0.6
0.2
0.4
0.8

0.6015625
0.2031250
0.4062500
0.8125000
0.6250000
0.2500000
0.5000000
0.0000000

Table A.5: Divergence of True and Simulated Values in the Doubling Map
number of digits and truncates the possibly innite series of digits of a rational number.
The left part of Table A.5 lists the true values {xt } of the period-three cycle and the
values calculated with the help of a REAL*4 arithmetic. It follows that an orbit consisting of such numbers cannot be calculated on a digital computer with the help of
the standard oating-point arithmetic. The same is true for those numbers whose exact
representation requires m digits following the period but which can be represented by a
computer only with n < m digits. Only the use of exact rational arithmetics can prevent
the calculation of incorrect results.
2. It might be suspected that this phenomenon is restricted to the case n < m as dened
above. However, this is not true. Consider the period-four cycle 0.6, 0.2, 0.4, 0.8, 0.6, . . ..
The right part of Table A.5 lists the true values and the values calculated by iterating
the map numerically. It can be observed that the third value deviates already from its
true representation. It depends to some degree on the used programming language
whether deviations in the outputs last digit reect a change in the internal representation of the number or just its output formatting. Usually, however, the deviation is
a consequence of the internal binary representation of a number. Iterating a number
often implies that the contribution of the last bit (the so-called least signicant bit) to
the represented values decreases. In many cases the implied internal change in the represented number is insignicant; in the present case of the doubling map an error is
systematically produced from one iteration step to the other.
The seeming convergence of both calculated time series in the two parts of Table A.5 is
a consequence of the particular map and these two properties of digital computers, i.e.,
truncating and increasing insignicance of the last bit. The map possesses the two xed
points x = 0 and x = 1. The pre-image of x = 0 in the interval (0, 1] is x = 0.5: once
x = 0.5 is reached, the trajectory jumps to x = 0 and stays there forever. The pre-image
of x = 0.5 consists of two values, namely x = 0.25 and x = 0.75. This branching tree
can be followed for a while and it will turn out that all numbers in the interval with 25
as the last two digits in the representation of the number constitute the basin of x = 0.0.
Thus, when the two storage procedures described above incidentally generate an internal

A.4 Numerical Simulations and Chaotic Dynamics

281

representation of a number with 25 as the last digits, the iteration of the map will lead to
a quick convergence toward the xed point x = 0.0.
In other examples the errors generated by digital computers may not have those drastic
consequences as in the example described above. However, it is worthwhile (if not mandatory) to check the internal representations of numbers in digital computers (controlled by
a specic programming language with its own characteristics) before any conclusions on
possibly chaotic dynamic behavior in numerically calculated time series are drawn. For example, simple facts (like rounding in integer division) can easily be overlooked. A careful
examination of the limitations of digital computers can be helpful in avoiding severe misperceptions of the computations. Without such an investigation it cannot be excluded that
the observed chaotic or non-chaotic trajectories are not the results of the inherent dynamics
of the considered systems but a consequence of disregarded computer architecture.

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Name Index

A braham, R.H., 82, 121, 182, 283

Abramowitz, M., 284
Alexander, J.C., 96, 283
Allen, R.G.D., 249, 273, 283
Amano, A., 48, 283
Ames, W.F., 298
Ancot, J.P., 289
Anderson, G.S., 121, 283
Anderson, P.W., 284, 286, 290, 291
Andronov, A.A., 36, 42, 63, 73, 82, 283
Aoki, M., 285
Arneodo, A., 193, 194, 198, 283, 288
Arnold, V.I., 63, 66, 82ff., 233, 283f.
Arrow, K.J., 21, 47, 286, 286, 284, 284,
284, 290, 291, 295, 306
Arrowsmith, D.K., 40f., 63, 66, 266, 284
Arthur, W.B., 246, 284
Azariadis, C., 148, 284
B aek, E.G., 287

Bajo-Rubio, O., 225, 284

Bala, V., 148, 284
Balasko, Y., 238f., 284
Barnett, W.A., 205, 226, 284, 286f.,
289, 292, 294, 304, 308
Batten, D., 293, 302
Baumol, W.J., 21, 121, 124, 228, 284f.,
Beckmann, M.J., 48, 50, 285
Begg, D.K.H., 148, 285
Bellman, R., 145, 285
Benassy, J.P., 47, 285
Benedicks, M., 150, 285
Benettin, G., 218, 285
Benhabib, J., 98, 101, 108f., 121, 124,
143, 146f., 285

310

Berge, P., 121, 133, 172, 179, 195, 202,

203, 205, 206, 212, 285
Berndt, E.R., 284 , 287
Bernoulli, D., 14
Beyn, W.-J., 194, 285
Birchenhall, C.R., 238, 285
Blackwell, D., 145, 285
Blad, M.C., 238, 285
Blatt, J.M., 24, 28f., 285f.
Blaug, M., 11, 286
Bohm, V., 157, 286
Boldrin, M., 20, 105, 143, 148, 286
Boyce, W.E., 40ff., 52, 286
Braun, M., 259, 261f., 286
Brezinski, C., 298
Brock, W.A., 23f., 53, 121, 145, 147,
205f., 218, 223f., 249, 286f.

Brody,
A., 25, 72, 73, 287

C airns, S.S., 305

Candela, G., 148, 287
Carleson, L., 150, 285
Carr, J., 266, 287
Cartwright, M.L., 18, 182, 186, 287
Casdagli, M., 231, 287
Casti, J., 287, 293, 302
Chaikin, C.E., 36, 42, 63, 73, 82, 283
Chang, W.W., 43f., 287
Chen, P., 121, 205, 226, 246, 284, 288,
307f.
Chiarella, C., 72f, 76, 107, 148, 288
Choi, S., 226, 284
Chow, S.-N., 36, 288
Chua, L.O., 120, 276, 301
Clark, C.W., 62, 288

Name Index

Name Index
Coddington, E.A., 40, 288
Coleman, D., 306
Collet, P., 121f., 127, 130, 136ff., 288
Coullet, P., 193f., 283f., 288
Crutcheld, J.P., 8, 288
Cugno, F., 71, 118, 288
Cushing, J.M., 246, 289

Dale, C., 202, 289

Dana, R.A., 102, 153, 289
Davies, D.G., 48, 289
Davis, M., 241, 308
Dawkins, R., 12, 289
Day, R.H., 130, 136f., 139, 146ff., 159f.,
285, 289
Debreu, G., 9, 21, 41, 49, 289
Dechert, W.D., 121, 147, 218, 224, 287,
289, 293
Delli Gatti, D., 156, 289
Dendrinos, D.S., 149, 290
Deneckere, R.J., 145, 286, 290
Dernburg, T.F., 106, 290
Dernburg, J.D., 106, 290
Desai, M., 69, 290
Descartes, R., 7
Devaney, R.L., 121f., 124, 150, 279, 290
Diamond, P., 150, 290
Diamond, P.A., 101, 290
Dierker, E., 36, 49, 290
DiPrima, R.L., 40ff., 52, 286
Dockner, E.J., 101, 290
Dopfer, K., 148, 290
Dosi, G., 304
E ckalbar, J.C., 121, 290
Eckmann, J.-P., 29, 121f., 127, 130,
136ff., 205, 215, 217, 219, 225,
288, 290
Edgeworth, F.Y., 11, 290
Eliasson, G., 289
Euler, L. 14
Falconer, K., 291
Farkas, M., 25, 72f., 287
Farmer, J.D., 215, 228, 247, 288, 291
Farmer, R.E.A., 118, 291
Fatou, P., 18, 120, 291
Feichtinger, G., 101, 148, 288, 290f.,
296, 298f., 302
Feigenbaum, M., 127, 291
Feinstein, C.H., 293
Fernandez-Rodriguez, F., 284

311

312

Filippov, A., 53
Fischer, E.O., 242, 291
Fischer, P., 283, 295, 297
Fisher, I., 10, 291
Flaschel, P., 49, 69f., 291ff.
Foley, D.K., 110, 292
Frank, M.Z., 205, 224, 226, 231, 292
Franke, R., 73, 101, 148, 292
Frisch, R., 23, 292
Fudenberg, D., 101, 290
Furstenberg, G.M., 286
Furth, D., 239, 292

Gabisch, G., 24, 43, 47, 69, 148, 234,

236, 239, 292

Gaertner, W., 148, 156, 292
Galeotti, M., 53, 58, 286, 292, 298f.,
307
Galgani, L., 218, 285
Galileo, G. 7
Gallegati, M., 156, 289
Gandolfo, G., 27, 64, 69, 106, 195, 249,
254, 259, 293
Gantmacher, F.R., 107, 259, 293
Gardini, L., 148, 156, 287, 289, 293
Garrido, L., 173, 293
Gencay, R., 218, 224, 289, 292f.
George, D., 239, 293
Georgescu-Roegen, N., 9, 13, 293
Geronazzo, L., 286, 298f., 307
Geweke, J., 284, 286, 289, 292, 294,
304, 308
Glass, L., 247, 293
Gleick, J., 246, 293
Glendinning, P., 194, 293
Glombowski, J., 69, 293
Goldberg, S., 255, 293
Goodwin, R.M., 19, 49, 67, 69, 182f.,
186, 288, 293, 300, 307
Gori, F., 53, 58, 286, 292, 298, 299, 307
Grandmont, J.-M., 122, 147f., 161, 293,
294
Granger, C.W.J., 202, 224, 294
Grassberger, P., 158, 211, 218f., 221,
294, 297
Grebogi, C., 158, 170, 211, 294, 299f.
Guckenheimer, J., 29f., 33f., 39f., 54,
73, 76, 81, 84, 87, 96, 99f., 107,
115f., 121, 133, 135, 138, 161, 182,
184, 193, 205, 215, 259, 265ff., 294
Guesnerie, R., 143, 148, 284, 294
Guillemin, V., 38, 294

Name Index

Name Index
Gutowski, H., 246, 294

H aag, G., 235, 307

Haavelmo, T., 141, 294
Hahn, F.H., 31, 47, 254, 284, 295
Hahn, F.R., 148, 295
Hahn, W., 34, 295
Hairer, E., 277, 295
Haken, H., 176, 219, 235, 247, 291,
295, 295, 303, 306
Hale, J.K., 36, 288
Hammer, G., 292
Harcourt, G.C., 19, 295
Hassard, B.D., 96, 295
Hatanaka, M., 202, 294
Haxholdt, C., 186, 295
Hayek, F.A., 300
Hegel, G.W.F., 8
Heiner, R.A., 147, 295
Helleman, R., 297
Herrmann, R., 103, 153, 295
Herzel, H., 218, 297
Hicks, J.R., 24, 156, 295
Hilbert, D., 51, 295
Hildenbrand, W., 49, 287, 295
Hinich, M.J., 226, 284
Hirsch, M.W., 34, 40f., 52, 64, 84, 249,
259, 295
Hodgson, G.M., 11, 295
Holden, A.V., 294, 297, 306, 308
Holmes, P.J., 29f., 33f., 39f., 54, 73, 76,
81, 84, 87, 96, 99f., 107,115f., 121,
133, 161, 182, 184, 193, 205, 215,
259, 265ff., 294, 302
Hommes, C., 148, 156f., 295, 296, 301
Hopf, E., 95, 296
Hsieh, D., 121, 287, 296
Hunt, E.K., 293
Hurwitz, L., 47, 284
Ichimura, S., 55, 296
Intriligator, M., 295f., 300, 304, 306
Invernizzi, S., 276, 296
Iooss, G., 115, 296f.,
Ipaktchi, A., 294
Jacobson, M.V., 136, 296
Jammernegg, W., 242, 291
Jarsulic, M., 157, 246, 296
Jensen, R.V., 148, 296
Jevons, W.S., 2, 9f., 296
Johansson, B., 293, 302

313

314

Jojima, K., 12, 296

Julia, G., 18, 120, 296
Jungeilges, J., 156, 292

K aldor, N., 59, 153, 296

Kalecki, M., 23, 43, 222, 297

Kamphurst, S.O., 290
Kant, I. 6
Kantz, H., 158, 297
Kapitaniak, T., 245, 297
Karlin, S., 301
Karlquist, A., 287
Kazarinoff, N.D., 96, 295
Kelsey, D., 121, 147, 297
Kelso, J.A.S., 291
Kepler, J. 7
Kim, K.-H., 148, 289
Kirman A.P., 49, 295, 297
Kocak, H. 120, 297
Koch, B.-P., 297
Kostelich, E.J., 221, 306
Koyck, L.M., 297
Kruger, M., 69, 288, 291, 292, 293, 300,
307
Krasner, S., 304
Kurihara, K.K., 296
Kurths, J., 218, 297

L agrange, J. de, 14
Lanford, O.E., 161, 297
Langford, W.F., 177, 297
Laplace, P.S., 7f., 14, 77
Larsen, E.R., 157, 182, 186, 227, 295,
297, 301, 305
Lasota, A., 136, 297
Lassalle, J.P., 34, 297
Lauwerier, H.A., 122, 297
LeBaron, B., 121, 224, 226, 287, 304
Lefschetz, S., 34, 297
Lehnert, D., 157, 304
Leibniz, G.W., 6
Leven, R.W., 297
Levi, M., 182, 184, 297
Levinson, N., 18, 40, 52, 182, 288
Li, T.Y., 18, 135, 298
Lichtenberg, A.J., 298
Liebermann, M.A., 298
Lines, M., 245, 298
Littlewood, J.E., 18, 182, 287, 298
Lienard, A., 298
Lorenz, E.N., 18, 120, 298

Name Index

Name Index
Lorenz, H.-W., 24, 43, 47, 49, 55, 58,
69, 161, 180, 182, 187, 200, 208,
234, 236, 239, 277, 292, 298f.
Lotka, A.Y., 62, 299
Lucas, R.E., 22, 299
Lux, T., 73, 101, 292, 299
Lyapunov, A.M., 299

M ackey, M.C., 247, 293

Majumdar, M., 148, 284
Malgrange, P., 102, 153, 289, 294
Malinvaud, E., 238, 299
Malliaris, A.G., 53, 249, 287
Malthus, T.R., 21, 113, 299
Marotto, F.R., 150, 155, 299
Marschak, J., 48, 299
Marsden, J.E., 82, 96, 99, 283, 299
Marshall, A., 2, 11, 21, 299
Martinengo, G., 27, 293
Marx, K. 8
Marzollo, A., 285
Mas-Colell, A., 48f., 299
May, R.M., 122, 231, 299, 305
Mayer-Kress, G., 306, 308
McCracken, M., 96, 99, 299
McDonald, S.W., 158, 299f.
McKenzie, L.W., 145, 300
Medawar, P.B., 11, 300
Medio, A., 108, 121, 136, 202, 205,
236, 276, 296, 300
Mees, A.I., 161, 300
Meese, R., 205, 300
Melese, F., 136, 300
Menger, C., 11, 300
Merton, R.C., 303
Metzler, L.A., 195, 300
Mill, J.St., 7, 10f., 300
Milnor, J.W., 36, 300
Mira, C., 158, 300
Mirowski, P., 9, 300
Misiurewicz, M., 135, 298
Miyao, T., 98, 101, 285
Montrucchio, L., 71, 118, 143, 286,
288, 301
Morecroft, J.D.W., 186, 297
Morishima, M., 49, 301
Mosekilde, E., 157, 182, 186, 227, 295,
297, 301, 305f.
N ell, E.J., 300
v. Neumann, J., 122, 306
Newhouse, S., 179, 301

315

316

Newman, P., 47, 301

Newton, I., 6, 14
Nicolis, G., 246, 301
Nijkamp, P., 149, 290, 299, 301, 303
Nishimura, K., 108f., 143, 285
Nitecki, Z., 161, 301
Novak, A., 101, 291
Novshek, W., 49, 301
Nusse, H.E 135, 137, 148, 156ff., 296,
301
Nrsett, S.P., 277, 295

Oster, G., 294

Ott, E., 121, 150, 158, 170, 220, 291,

294, 294, 299ff.

Packard, N.H., 288

Padoan, P.C., 27, 293
Pallaschke, D., 292
Papell, D.H., 225, 301
Pareto, V., 2, 9, 21
Parker, T.S., 120, 276, 301
Peixoto, M.M., 84, 294, 301, 305
Pelikan, S., 145, 170, 290, 294
Peters, E.E., 205, 302
Phillips, A.W., 55, 302
Pianigiani, G., 130, 135ff., 148, 159,
289, 298, 302
Pines, D., 284, 286, 290f.,
Place, C.M., 40f., 63, 66, 266, 284
Ploeg, F., van der 69, 148, 302
Pohjola, M.J., 69, 148, 302
Poincare, H., 17, 120, 302
Pollack, A., 38, 294
Pomeau, Y., 195, 285
Pompe, B., 297
Popper, K.R., 15, 302
Poston, T., 234, 238, 302
Potter, S.M., 225, 302
Prescott, D.M., 231, 302
Preston, C., 122, 137, 302
Prigogine, I., 246, 301
Procaccia, I., 211, 219, 221, 294
Prskawetz, A., 148, 302
Puu, T., 148, 180, 186, 302
R amsey, J.B., 226, 302
Rand, D., 148, 302, 306
Rand, R.H., 302
Rasmussen, S., 182, 297
Reggiani, A., 149, 299, 301, 303
Reichlin, P., 107, 118, 302

Name Index

Name Index
Reuter, G.E.H., 182, 186, 287
Ricardo, D., 6f., 21
Ricci, G., 19, 301, 307
Rommelfanger, H., 259, 303
Rose, A., 205, 300
Rosser, J.B., 149, 238f., 303
Rossler, O.E., 303
Rothman, P., 226, 302
Ruelle, D., 18, 29, 115, 121, 136, 170,
205, 215, 217, 219, 290, 301, 303
Ryder, H.E., 48, 50, 285

S aari, D.G., 49, 303

Salmon, M., 304

Samuelson, P.A., 23, 47, 71, 121, 148,
183, 303
Sargent, T.J., 22, 299
Sarkovskii, A.N., 303
Saunders, P.T., 233f., 303
Sayers, C.L., 205, 225f., 287, 301ff.,
Scheinkman, J.A., 145, 205, 224, 226,
287, 290, 304
Schinasi, G.J., 55, 304
Schmidt, K., 225, 304
Schoeld, R., 306
Schuster, H.G., 121, 304
Schwodiauer, G., 287
Schwarz, J.G., 293
Scott, K.A., 182, 283
Sebba, G., 12, 304
Semmler, W., 49, 101, 292, 299, 304f.
Shafer, W., 49, 147, 289, 304
Shaw, C.D., 121, 283
Shaw, R.S., 288
Shell, K., 284, 286, 289, 292, 294, 304,
308
Shilnikov, L.P., 193, 304
Sidorowich, J.J., 228, 291
Silverberg, G., 157, 246, 304
Simonovits, A., 25, 156f., 296, 304f.,
C., 173, 293
Simo,
Sinai, J.G., 305
Singer, D., 122, 137, 305
Slutzky, E., 23, 222, 305
Smale, S., 34, 40f., 52, 64, 84f., 158,
161, 165, 182, 249, 259, 295, 305
Smith, A., 6f., 21
Smith, O.K., 52, 298
Smith, W.R., 283, 295, 297
Smyth, D.J., 43f., 287
Sonnenschein, H., 49, 287, 299, 301,
304f.,

317

318

Sargent, T.J., 22, 299

Sorger, G., 101, 291, 305
Sosvilla-Rivero, S., 284
Sotomayor, J., 95, 305
Sparrow, C., 194, 275, 293, 305
Stahlecker, P., 225, 304
Stengos, T., 205, 224, 226, 231, 292,
302
Sterman, J.D., 157, 182, 186, 227, 297,
301, 305f.
Stewart, I., 234, 238, 302
Stewart, H.B., 161, 306
Stoker, J.J., 305
Stora, R., 297
Strelcyn, J.M., 218, 285
Stutzer, M., 141, 305
Sugihara, G., 231, 305
Suppes, P., 301
Swift, J.B., 308
Swinney, H.L., 306, 308
Szeg, G.P., 288

Takayama, A., 31, 48, 249, 306

Takens, F., 18, 115, 179, 205f., 301,
303, 306
Thoben, H., 12, 306
Thom, R., 233f., 306
Thompson, J.M.T., 161, 306
Thomsen, J.S., 157, 182, 186, 297, 301,
306
Tomita, K., 182, 306
Torre, V., 180, 306
Transue, W., 136, 300
Tresser, C., 193f., 283, 288, 306
v. Tunzelmann, G.N., 70, 306
Tvede, M., 186, 295
Ueda, Y., 120, 306

Ulam, S.M., 122, 306

Urban, R., 148, 296
Uzawa, H., 47, 306

Varian, H.R., 36, 38, 40, 283, 290, 306

Vastano, J.A., 221, 306, 308
Velupillai, K., 19, 69, 77, 301, 303.,
306f.
Vercelli, A., 82, 84, 288, 300, 307
Verhulst, P.-F., 114, 307
Vidal, C., 195, 285
Voltaire, 6
Volterra, V., 62, 307

Name Index

Name Index

Walker, D.A., 47, 307

Walras, L., 2, 9, 21, 47, 159, 307
Walter, J.-L., 148, 289
Wan, Y-H., 96, 295
Wanner, G., 277, 295
Weber, W.E 226, 284
Weghorst, W., 148, 292
Weidlich, W., 235, 307
Weintraub, E.R., 239, 307
Wen, K.-H., 246, 307f.
West, B.J., 13f., 113f., 307
Westlund, A.H., 224, 307
White, H., 284, 287
White, R.W., 149, 246, 307
Whitley, D., 87, 110f., 122, 307
Wiggins, S., 28,f., 38f., 121, 259, 266f.,
307f.
Wirl, F., 101, 291
Wolf, A., 215f., 218, 220f., 308
Wolfstetter, E., 69f., 308
Woodcock, A.E.R., 241, 308
Woodford, M., 20, 143, 147f., 286, 294,
308
Yan-Qian, Y., 51, 53f., 308
Yorke, J.A., 18, 96, 120, 135f., 158, 170,
283, 291, 294, 297ff.
Yosida, K., 275, 308
Young, L., 306
Z eeman, E.C., 233, 238, 308
Zhang, W-B., 101, 108, 308
Zhifen, Z., 52, 58, 308

319

Subject Index

A ccelerator, 24
Adams/Gear algorithm, 277
adiabatic approximation, 235,
adjustment coefcients, 73
-limit set, 39
amplitude, 256
approximation, linear, 22, 26
area preserving system, 65
arithmomorphic system, 13
attracting set, 29
attractor, 28, 65
cyclical 35
strange, 150, 170
autocorrelation function, 203
auctioneer, 47
averaging, 54
Backward iteration, 140

basin boundary, 29
basin of attraction, 29, 156, 199
BDS test, 224
Bellmans equation, 145
Bendixson criterion, 45
Bernoulli differential equation, 142
bifurcation, 680ff.,
bifurcations, continuous time, 81
bifurcations, discrete time, 110
bifurcation diagram, 81
bifurcation point, 81
bifurcation set, 236
bifurcation value, 82
ip, 111, 123
fold, 87, 110f.,
Hopf, see Hopf bifurcation
pitchfork, 91, 110f.

Subject Index

subcritical, 93, 97, 113

supercritical, 93, 98, 113
transcritical, 89, 110f.
biology 11
branch of xed points, 81
broad band noise, 203

Cantor set, 158, 164

middle-third set, 210

capital stock, desired, actual 55
catastrophe theory, 232ff.
catastrophes, elementary, 233
fold, 234,
cusp, 234f.,
swallowtail, 234
buttery, 234
elliptic umbilic, 234
hyperbolic umbilic, 234
parabolic umbilic, 234
ceiling 24
cellular automata, 246
center dynamics, 252
center manifold, 34, 100, 107
center manifold theorem, 264
chaos,
in discrete-time models, 121ff.
in continuous-time models, 167ff.
empirical results, 223ff.
topological, 135
chaotic regime, 129
characteristic equation, see equation
characteristic roots, see eigenvalues
class struggle, 67
classical mechanics, 5ff., 252
closed orbit, 35, 252

321

322

cobweb model, 148

codimension, 234
complex roots, see roots, complex
conservative system, 61, 71, 77
consumption frontier, 71, 108
contraction, on an attractor, 162
correlation,
dimension, 208, 211f.
integral, 212
corridor stability, 98
coupling of oscillators, 174ff.,
critical value, 122
cross-dual adjustment, 48

Degree theory, 36
DeMoivres theorem, 256
depression, 240
Descartes rule, 253
determinant, 250
deterministic theory, 15f.
deterministic worldview, 13ff.
diffeomorphism, 150, 162
difference equations, see equation, difference
differential operator, 117, 142, 273
dimension,
of an attractor, 181ff.,
correlation, see correlation dimension,
embedding, see embedding dimension,
Euclidian, see Euclidian dimension,
fractal, see fractal dimension,
Hausdorff, see Hausdorff dimension,
discount factor, 144
discount rate, 108
discriminant, 237
dissipative system, 62, 71, 216
divergence, 65, 214
Divisa index, 226
doubling map, 279
Endomorphism, 123
eigenspaces, 32
eigenvalues, 56, 97, 178, 260ff.
complex, 103, 252, 256
dominant, 256
real, 252, 256
eigenvector 260
eigenvectors, generalized, 261
elementary catastrophes, 234

Subject Index

Subject Index
embedding, 205
embedding dimension, 205,
endomorphism, 123
enlightenment, 6
entropy, metric, 218
Kolmogorov, see Kolmogorov entropy,
equilibrium surface, 235
ergodic behavior, 131
equation,
Bernoulli, 142
characteristic eq., 250
difference eq., 110ff., 122ff., 255ff.
differential eq., 27ff., 87ff., 168ff.,
234f., 249ff.
Lienard eq., 52, 56, 189
logistic eq., 122, 146, 170, 204
Rayleigh eq., 186
van der Pol eq., 52, 76, 182
equivalence, 83
Euclidian dimension, 208
exchange of stability, 90
expanding xed point, 150
extrapolative expectations 196

Feigenbaum number, 127

nancial intermediation 147
nancial markets, 148
nite differences, 117, 142
rst integral, 63
rst return map, 172
xed point,
stable, 31
expanding xed point, 150
of order k, 123
oor, 24
ow, 28, 61
focus, 252
folding, on an attractor, 213
forced oscillation, see oscillator, forced,
Fourier transform, 202
fractal dimension, 210ff.,
frequency, 175, 202. 252
friction, 61
Gaussian plane, 96, 256

general equilibrium analysis, 25, 147

generations, overlapping, 147f.
Goodwin model,
nonlinear accelerator, 155ff.,
predator-prey, 67, 118, 148
gradient systems, 236

323

324

Grassberger/Procaccia plot, 213

growth model, 91, 138

H amiltonian, 108
harmonic oscillator, 252
Hartman-Grobman theorem, 33
Hausdorff dimension, 209, 220
heaviside function, 212
Henon map, 150
Hicks model, 24
histogram, 130
homeomorphism, 83
homoclinic,
orbits, 39, 152, 194
points, 165
Hopf bifurcation, 178f.
discrete time, 115f.
continuous time, 95f.
horseshoe map, 158, 161, 182
hyperbolic xed point, 82
Implicit function theorem, 96

Inada conditions, 91
index theory, 36ff.
intermittency, 133
invariant measure, 136
invariant set, 28, 164, 192, 198
invariant subspaces, 32
inverse Fourier transform 202
invertibility, 104, 130, 169f.,
investment behavior, 43
irreversible processes, 77,
IS-LM model, 105, 147
isolation technique, 13
iterate, 113

Jacobian matrix, 33f.

joint probability, 219

K aldor model 43, 93, 101, 117, 239

Keynesian demand policy, 187f.
Kolmogorov entropy, 218,

L abor market 88
laboratory experiment, 227
lag, 72, 269
constant, 271
distributed, 270
exponential, 271
multiple exponential, 174
lag operator, 272

Subject Index

Subject Index
Landau scenario, 179
Lausanne school, 9
Lebesgue measure, 135f.
Levi/Poincare map, 184
Levinson/Smith theorem, 189
Li/Yorke theorem 134, 141
Liapunov, see Lyapunov
Lie derivative, 65, 198
Lienard equation, see equation,
Lienard transformation, 55
limit cycle, 35, 65, 217
uniqueness, 51ff.
limit set, 39
linear regression 24
Lipschitz condition 53
Lorenz attractor, 168
Lotka/Volterra equations, 62, 69
Lyapunov,
dimension, 220
exponent, 198, 208, 213
function, 34
numbers, 214
spectrum, 214
stability, 31

M anifold, 33, 65, 235

master equation, 235
maximum principle, 108
measure theory, 136
measure, absolutely continuous invariant, 136
mechanistic worldview, 12
mercantilistic policy, 6
Metzler model, 195
m-history, 206
mixing behavior, 132
modulus, 117, 256
multiplicative ergodic theorem, 215
multiplier-accelerator model, 24, 55,
148
Nearest neighbor, 228

neutrally stable, 62
New Classical Macroeconomics, 23
Newhouse/Ruelle/Takens theorem,
179
node, 252
noisy chaos, 245
nonlinear accelerator, 183, 186
non-wandering set, 30
normal form, 100

325

326

Offer price, 48

-stability, 39
optimal control, 25, 143
orbit, 27
order equation, 204
oscillator,
coupled, 174
forced, 182
overlapping generations 118, 147

Peixotos theorem, 85

perfect foresight, 147

period doubling, 113, 127
Pesins identity, 220
Phillips curve, 68, 71, 241
Phillips Model 54
Poincare index, 36
Poincare-Bendixson theorem, 39, 45,
61, 105
Poincare map, 80, 110, 171, 185
Poincare section, 170
Poincare-Hopf theorem, 38
policy function, 143, 145
population dynamics, 113
positive invariant set, 28
potential, 236
power spectrum, 203
predator-prey system, 61, 66
predictability, 7, 228
prediction, 78
principal minors, 106
psychology, 11

Quantum mechanics, 15, 17

quasi-linear, 19
quasi-periodic motion, 176

R andom process, 100, 202

random process, 28, 119, 228
rational expectations, 22, 222
Rayleigh eq., see equation,
reaction speed, 55
recession, 240
reductionism, 11
relativity theory, 17
repelling set, 29
residual diagnostic, 223
reversibility, 61f.
roots,
characteristic, 256
complex, 103, 252, 256

Subject Index

Subject Index
dominant, 256
real, 252, 256
Rossler attractor, 169, 195
routes to turbulence, 180f.
Routh matrix, 253
Routh-Hurwitz criterion, 106, 253
Ruelle-Takens scenario, 180f.
Runge/Kutta algorithm, 277

Saddle loop, 39
saddle node, 88
saddle point, 108, 252
Sarkovskii theorem, 134
saturation, 114, 139
sawtooth oscillation, 256
Schur matrices, 257
Schwarzian derivative, 113, 137, 141,
143
scientic progress, 20
sensitive dependence, 132
separatrix, 40, 252
set,
bifurcation set, 236
connected set, 42
limit, 39
singularity set, 236
uncountable, 135
shift operator, 273
Shilnikov theorem, 193
shufe diagnostics, 224
sink, 252
slaving principle, 235
Smale-Birkhoff homoclinic theorem,
165
snap-back repeller, 150
solution curve, 27
source, 252
spectral analysis, 202
stability,
asymptotic, 31 252
global, 34
neutral, 252
structural, 70, 82
structural, of a function 234
stagation, 241
stochastics, 222
strange attractor, 120, 150, 169f., 180,
208
stretching, 162, 213
structural stability, 82f.
subcritical, see bifurcation
S -unimodal map, 137

327

328

supercritical, see bifurcation

superposition, principle of, 13f.
synergetics, 204

Taylor expansion, 33, 44

tatonnement, 47, 148, 159, 239
tent map, 132, 136
time constant, 74
topological chaos, 135
topologically transitive, 29
torus, 175, 217
trace, 62, 250
trajectory, 27
transient, 30, 78, 130, 157
transient chaos, 165, 186
transversal homoclinic orbit, 165
transversality, 88
trapping region, 29, 186
turbulence, 179
Unfolding, universal, 234

unimodal map, 143

uniqueness, of Limit Cycles 51
unit circle, 116
unit root processes, 224
universal constant, 107
unsharpness relation, 15
urban decline, 149

Value function, 145

van-der-Pol oscillator, 52, 76, 182

vector eld, 27
Verhulst dynamics, 122
volume preserving system, 65

Wandering set, 30
weakly forced oscillator 183
weltanschauung, 10
windows, 129

Subject Index