Endogenous Cycles in Optimal Monetary Policy with a Nonlinear Phillips Curve

There is by now a large consensus in modern monetary policy. This consensus has been built upon a dynamic general equilibrium model of optimal monetary policy with sticky prices a la Calvo and forward looking behavior. In this paper we extend this standard model by introducing nonlinearity into the Phillips curve. As the linear Phillips curve may be questioned on theoretical grounds and seems not to be favoured by empirical evidence, a similar procedure has already been undertaken in a series papers over the last few years, e.g., Schaling (1999), Semmler and Zhang (2004), Nobay and Peel (2000), Tambakis (1999), and Dolado et al. (2004). However, these papers were mainly concerned with the analysis of the problem of inflation bias, by deriving an interest rate rule which is nonlinear, leaving the issues of stability and the possible existence of endogenous cycles in such a framework mostly overlooked. Under the specific form of nonlinearity proposed in our paper (which allows for both convexity and concavity and secures closed form solutions), we show that the introduction of a nonlinear Phillips curve into a fully deterministic structure of the standard model produces significant changes to the major conclusions regarding stability and the efficiency of monetary policy in the standard model. We should emphasize the following main results: (i) instead of a unique fixed point we end up with multiple equilibria; (ii) instead of saddle--path stability, for different sets of parameter values we may have saddle stability, totally unstable and chaotic fixed points (endogenous cycles); (iii) for certain degrees of convexity and/or concavity of the Phillips curve, where endogenous fluctuations arise, one is able to encounter various results that seem interesting. Firstly, when the Central Bank pays attention essentially to inflation targeting, the inflation rate may have a lower mean and is certainly less volatile; secondly, for changes in the degree of price stickiness the results are not are clear cut as in the previous case, however, we can also observe that when such stickiness is high the inflation rate tends to display a somewhat larger mean and also higher volatility; and thirdly, it shows that the target values for inflation and the output gap (π^,x^), both crucially affect the dynamics of the economy in terms of average values and volatility of the endogenous variables --- e.g., the higher the target value of the output gap chosen by the Central Bank, the higher is the inflation rate and its volatility --- while in the linear case only the π^ does so (obviously, only affecting in this case the level of the endogenous variables). Moreover, the existence of endogenous cycles due to chaotic motion may raise serious questions about whether the old dictum of monetary policy (that the Central Bank should conduct policy with discretion instead of commitment) is not still very much in the business of monetary policy.Optimal monetary policy, Interest Rate Rules, Nonlinear Phillips Curve, Endogenous Fluctuations and Stabilization

Chaotic Dynamics in Optimal Monetary Policy

There is by now a large consensus in modern monetary policy. This consensus has been built upon a dynamic general equilibrium model of optimal monetary policy as developed by, e.g., Goodfriend and King (1997), Clarida et al. (1999), Svensson (1999) and Woodford (2003). In this paper we extend the standard optimal monetary policy model by introducing nonlinearity into the Phillips curve. Under the specific form of nonlinearity proposed in our paper (which allows for convexity and concavity and secures closed form solutions), we show that the introduction of a nonlinear Phillips curve into the structure of the standard model in a discrete time and deterministic framework produces radical changes to the major conclusions regarding stability and the efficiency of monetary policy. We emphasize the following main results: (i) instead of a unique fixed point we end up with multiple equilibria; (ii) instead of saddle--path stability, for different sets of parameter values we may have saddle stability, totally unstable equilibria and chaotic attractors; (iii) for certain degrees of convexity and/or concavity of the Phillips curve, where endogenous fluctuations arise, one is able to encounter various results that seem intuitively correct. Firstly, when the Central Bank pays attention essentially to inflation targeting, the inflation rate has a lower mean and is less volatile; secondly, when the degree of price stickiness is high, the inflation rate displays a larger mean and higher volatility (but this is sensitive to the values given to the parameters of the model); and thirdly, the higher the target value of the output gap chosen by the Central Bank, the higher is the inflation rate and its volatility.Comment: 11 page

Avalanche Collapse of Interdependent Network

We reveal the nature of the avalanche collapse of the giant viable component in multiplex networks under perturbations such as random damage. Specifically, we identify latent critical clusters associated with the avalanches of random damage. Divergence of their mean size signals the approach to the hybrid phase transition from one side, while there are no critical precursors on the other side. We find that this discontinuous transition occurs in scale-free multiplex networks whenever the mean degree of at least one of the interdependent networks does not diverge.Comment: 4 pages, 5 figure

Geometry, stochastic calculus and quantum fields in a non-commutative space-time

The algebras of non-relativistic and of classical mechanics are unstable algebraic structures. Their deformation towards stable structures leads, respectively, to relativity and to quantum mechanics. Likewise, the combined relativistic quantum mechanics algebra is also unstable. Its stabilization requires the non-commutativity of the space-time coordinates and the existence of a fundamental length constant. The new relativistic quantum mechanics algebra has important consequences on the geometry of space-time, on quantum stochastic calculus and on the construction of quantum fields. Some of these effects are studied in this paper.Comment: 36 pages Latex, 1 eps figur

Robustness of planar random graphs to targeted attacks

In this paper, robustness of planar trivalent random graphs to targeted attacks of highest connected nodes is investigated using numerical simulations. It is shown that these graphs are relatively robust. The nonrandom node removal process of targeted attacks is also investigated as a special case of non-uniform site percolation. Critical exponents are calculated by measuring various properties of the distribution of percolation clusters. They are found to be roughly compatible with critical exponents of uniform percolation on these graphs.Comment: 9 pages, 11 figures. Added references.Corrected typos. Paragraph added in section II and in the conclusion. Published versio

On the nonlinearity interpretation of q- and f-deformation and some applications

q-oscillators are associated to the simplest non-commutative example of Hopf algebra and may be considered to be the basic building blocks for the symmetry algebras of completely integrable theories. They may also be interpreted as a special type of spectral nonlinearity, which may be generalized to a wider class of f-oscillator algebras. In the framework of this nonlinear interpretation, we discuss the structure of the stochastic process associated to q-deformation, the role of the q-oscillator as a spectrum-generating algebra for fast growing point spectrum, the deformation of fermion operators in solid-state models and the charge-dependent mass of excitations in f-deformed relativistic quantum fields.Comment: 11 pages Late

Rotated multifractal network generator

The recently introduced multifractal network generator (MFNG), has been shown to provide a simple and flexible tool for creating random graphs with very diverse features. The MFNG is based on multifractal measures embedded in 2d, leading also to isolated nodes, whose number is relatively low for realistic cases, but may become dominant in the limiting case of infinitely large network sizes. Here we discuss the relation between this effect and the information dimension for the 1d projection of the link probability measure (LPM), and argue that the node isolation can be avoided by a simple transformation of the LPM based on rotation.Comment: Accepted for publication in JSTA