Economics Dynamics Problems 32

Economics Dynamics Problems 32 - 16 Economic Dynamics (1)...

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16 Economic Dynamics (1) the time-evolution values, (2) the parameter values, and (3) the initial conditions. A system for which all three are known is said to be deterministic . If such a de- terministic system exhibits chaos, then it is very sensitive to initial conditions. Given very small differences in initial conditions, then the system will after time behave very differently. But this essentially means that the system is unpredictable since there is always some imprecision in specifying initial conditions, 5 and there- fore the future path of the system cannot be known in advance . In this instance the future path of the system is said to be indeterminable even though the system itself is deterministic . The presence of chaos raises the question of whether economic fluctuations are generated by the ‘endogenous propagation mechanism’ (Brock and Malliaris 1989, p. 305) or from exogenous shocks to the system. The authors go on, Theories that support the existence of endogenous propagation mechanisms typ- ically suggest strong government stabilization policies. Theories that argue that
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