Nonlinear Dynamics, Psychology, and Life Sciences, Vol. 13, Iss. 4, October, 2009, pp. 445-466
@2009 Society for Chaos Theory in Psychology & Life Sciences


Unemployment and Inflation Dynamics Prior to the Economic Downturn of 2007-2008

Stephen J. Guastello, Marquette University, Milwaukee, WI
Adam Myers, Marquette University, Milwaukee, WI

Abstract: This article revisits a long-standing theoretical issue as to whether a "natural rate" of unemployment exists in the sense of an exogenously driven fixed-point Walrasian equilibrium or attractor, or whether more complex dynamics such as hysteresis or chaos characterize an endogenous dynamical process instead. The same questions are posed regarding a possible natural rate of inflation along with an investigation of the actual relationship between inflation and unemployment for which extent theories differ. Time series of unemployment and inflation for US data 1948-2008 were analyzed using the exponential model series and nonlinear regression for capturing Lyapunov exponents and transfer effects from other variables. The best explanation for unemployment was that it is a chaotic variable that is driven in part by inflation. The best explanation for inflation is that it is also a chaotic variable driven in part by unemployment and the prices of treasury bills. Estimates of attractors’ epicenters were calculated in lieu of classical natural rates.

Keywords: economic crisis, unemployment, inflation, Lyapunov exponent, chaos, attractor