Diagnosing and Treating Bifurcations in Perturbation Analysis of Dynamic Macro Models
13 Pages Posted: 26 Apr 2007
Date Written: April 2007
Abstract
In perturbation analysis of nonlinear dynamic systems, the presence of a bifurcation implies that the first-order behavior of the economy cannot be characterized solely in terms of the first-order derivatives of the model equations. In this paper, we use two simple examples to illustrate how to detect the existence of a bifurcation. Following the general approach of Judd (1998), we then show how to apply l'Hospital's rule to characterize the solution of each model in terms of its higher-order derivatives. We also show that in some cases the bifurcation can be eliminated through renormalization of model variables; furthermore, renormalization may yield a more accurate first-order solution than applying l'Hospital's rule to the original formulation.
Keywords: bifurcation, perturbation, relative price distortion, optimal monetary policy
JEL Classification: C63, C61, E52
Suggested Citation: Suggested Citation
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