Controlling Chaotic Fluctuations through Monetary Policy

Abstract

This paper applies the chaos control method (the OGY method) proposed by Ott et al. (1990, Physical Review Letters) to policy making in macroeconomics. This paper demonstrates that the monetary equilibrium paths in a discrete-time, two-dimensional overlapping generations model exhibit chaotic fluctuations depending on the money supply rate and the elasticity of substitution between capital and labor under the assumption of the constant elasticity of substitution (CES) production function. We also show that the chaotic fluctuations can be stabilized by controlling the money supply rate by using the OGY method.