Chaotic Dynamics of a Piecewise Linear Model of Credit Cycles with Imperfect Observability

Abstract

By incorporating information imperfection into the model of Asano et al. (2012), which is a special case of Matsuyama's (2007) model, we develop a model of endogenous business cycles to analyze how information imperfection affects the dynamic nature of the model. Some sort of "noise" representing information imperfection is shown to transform Matsuyama's model into a continuous, eventually expanding, piecewise linear map on the interval with the Markov property, which implies the occurrence of observable chaotic dynamics in our setting. Unlike the models of Asano et al. (2012) and Matsuyama (2007), our model deals with observable chaos for a large set of parameter values.