CHAOTIC DYNAMICS IN A CASH-IN-ADVANCE ECONOMY

This paper introduces sufficient conditions for the existence of deter ministic cycles and chaos in cash-in-advance models, building on the e arlier work of Woodford (1994), Chaotic equilibria are shown to be par ticularly likely in the cash-in-advance model, because of a unique cha racteristic of such models: a discontinuous derivative in the differen ce equation map at the satiation level of real balances. The existence of a kink means that chaotic equilibria may exist without implausibly large curvatures in the utility function. Since a chaotic time series that makes use of the kink would sometimes exhibit zero nominal inter est rates, the paper also gives an example of chaos in which nominal i nterest rates remain strictly positive. (C) 1998 Elsevier Science B,V. All rights reserved.