Chaotic dynamics in a cash-in-advance economy

This paper introduces sufficient conditions for the existence of deterministic cycles and chaos in cash-in-advance models, building on the earlier work of Woodford (1994), Chaotic equilibria are shown to be particularly likely in the cash-in-advance model, because of a unique characteristic of such models: a discontinuous derivative in the difference 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 interest rates, the paper also gives an example of chaos in which nominal interest rates remain strictly positive. (C) 1998 Elsevier Science B,V. All rights reserved.