Deterministic chaos in government debt dynamics with mechanistic primary balance rules

Details Deterministic chaos in government debt dynamics with mechanistic primary balance rules Deterministic chaos in government debt dynamics with mechanistic primary balance rules

2011-09-05

arxiv.org/abs/1109.0942v1

Nonlinear Sciences

Chaotic Dynamics

4 figures

Scientific paper

This paper shows that with mechanistic primary budget rules and with some simple assumptions on interest rates the well-known debt dynamics equation transforms into the infamous logistic map. The logistic map has very peculiar and rich nonlinear behaviour and it can exhibit deterministic chaos with certain parameter regimes. Deterministic chaos means the existence of the butterfly effect which in turn is qualitatively very important, as it shows that even deterministic budget rules produce unpredictable behaviour of the debt-to-GDP ratio, as chaotic systems are extremely sensitive to initial conditions.

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