A nonlinear model of the U.S. economy

Abstract

According to orthodox Keynesian economic theory, sig nificant unemployment and inflation should not occur simultaneously (i.e., "stagflation" should not exist) in a highly developed modern economy. However, both have occurred simultaneously in the United States since 1973.

This paper describes an economic model being developed to investigate the causes of stagflation; this model includes nonlinearities and discontinuities not in corporated in other macroeconomic models. In its present form the model does not include all the var iables necessary to achieve its purpose, and its parameters and initial conditions have been set at arbitrary "reasonable" values. Much work remains to be done before it can simulate stagflation in the economy of the United States. The responses of the present model to initial conditions leading to stag nation, moderate growth, and high-pressure growth situations are reported and analyzed in this paper.

The results obtained by experiments conducted on the model reflect the behavior of an idealized competi tive capitalistic economy with implicitly flexible prices and explicitly flexible interest rates. The model eventually produces full employment and steady growth regardless of the initial conditions used. This behavior implies that the simultaneous occur rence of unemployment and inflation should not exist very long in such an economy.