Mohamed Rehan M S
Center of Excellence in Systems Science Indian Institute of Technology, Jodhpur 13th November 2013
Mathematical Formulation
Multiple mathematical models for NAIRU Phillips Curves All models carry the two basic principles
Inflation is inversely proportional to Unemployment in the short run In the long run, monetary policy cannot affect unemployment
ot =
Jt Ut +d (1Ut )
Jt = Jobs created at time t d = Fraction of currently employed people looking for better jobs
Mohamed Rehan M S rehan@iitj.ac.in Dynamics of Unemployment and Inflation
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1 (e t
wb,t wp wp
= expected rate of inflation = real bargained wage = real price determined wage
wp = 1 y wb,t = 1 1 b Ut y
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= 0.04 = 2 = 0.5 L= 1
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Numerical Analysis
Fixed point obtained at (0.0224,0.03) Stability analysis for various values of i
i=0.12, =-0.8239,0.7356, stable i=0.16, =-1.4104,0.7395, unstable Stability lost at i=0.131992
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Chaotic Attractor
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Out of 50000 iterations, not a single point is repeated, when it goes to a chaotic orbit!!!
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Sensitive Dependence
Sensitive dependence studied using two initial points (0.2,0.15) & (0.2,0.15+10-10) The points diverge from each other with time, implying that the system shows sensitive dependence on initial conditions As t tends to infinity, both points converge to entirely different orbits
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Basin of Attraction
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Conclusions
The NAIRU model exhibits chaotic behavior after a certain value of inflow of people to unemployment (approx. 0.18). Hence large layoffs, population bursts, heavy migration etc., can have serious impacts on the economy, and de-stabilize it by leading it to chaos Existence of chaotic orbits implies that there is no stable tradeoff
Mohamed Rehan M S rehan@iitj.ac.in Dynamics of Unemployment and Inflation
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Conclusions (Contd.)
The chaotic attractor resembles the original Phillips Curve with a negative slope However, the curve is composed of unstable disequilibria, and reaffirms that there is no feasible inflation-unemployment tradeoff Long periods of high inflation rates cannot occur. This should be kept in mind while designing monetary policy
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Future Prospects
Conduct analysis for different parameters, one by one. Conduct analysis for all parameters varying together and interacting with each other Instead of fixed values of various parameters, include their values from the actual time series. Try to develop a prediction technique for values in non-chaotic region Improve model with other exogenous inputs
Mohamed Rehan M S rehan@iitj.ac.in Dynamics of Unemployment and Inflation
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References
Day, Richard H. "Complex Economic Dynamics Vol. I. An introduction to dynamical systems and market mechanisms." (1994). Day, Richard Hollis. Complex economic dynamics: An introduction to Macroeconomic dynamics. Vol. 2. Vol. 2. Mit Press, 1999. Ferri, Piero, Edward Greenberg, and Richard H. Day. "The Phillips curve, regime switching, and the NAIRU." Journal of Economic Behavior & Organization 46, no. 1 (2001): 23-37. Neugart, Michael. "Complicated dynamics in a flow model of the labor market." Journal of Economic Behavior & Organization 53, no. 2 (2004): 193-213.
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QUESTIONS???
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THANK YOU!!
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