Chaos in Economics

Abstract

Chaos theory has generated a lot of excitement and important results in physics and some other fields. Can we say the same as regards economics? This paper briefly surveys the large body of literature on chaos in economics, about which much has been written. More specifically, the attention will be devoted to discuss the extent to which the techniques to approach chaos in economics can address market anomalies, complexity and chaotic phenomena. The various ways to detect chaotic behavior in economics can be well exemplified by considering exchange rates. We consider a continuous time exchange rate model that allows for heterogeneity of the agents' beliefs, in order to explore non-linearities and possible chaotic behavior since we believe that the correct approach is to try to find the dynamic model (if any) underlying the data. The model is econometrically estimated with Euro/Dollar data and examined for the possible presence of chaotic motion. The results indicate that the possibility of chaotic dynamics in our model is rejected.