On the transition from local regular to global irregular fluctuations

We present a general framework for understanding the transition from local regular to global irregular (chaotic) behaviour of nonlinear dynamical mode ls in discrete time. The fundamental mechanism is the unfolding of quadrati c tangencies between the stable and the unstable manifolds of periodic sadd le points. To illustrate the relevance of the presented methods for analysi ng globally a class of dynamic economic models, we apply them to the infini te horizon model of Woodford (1988), (J. Economic Theory, 40, 128-137), ame nded by Grandmont et al. (1998), (J. Economic Theory, 80) to account for ca pital-labour substitution, so as to explain the appearance of irregular flu ctuations, through homoclinic bifurcations, when parameter values are 'far' away from local bifurcation points. (C) 2000 Elsevier Science B.V. All rig hts reserved. JEL classification: E32.