Quantitative Finance and Economics (Apr 2020)
On the comparative analysis of linear and nonlinear business cycle model: Effect on system dynamics, economy and policy making in general
Abstract
Research on linear and nonlinear IS-LM models has been resonating under synonymous perspectives, confined to bifurcations and intangible relations to economic work systems. Trifle discussion exists on how choice of linear/nonlinear models affects policy making and almost no elaboration on framing an economic system within a linear and nonlinear structure to analyze their effect separately. Parameters surrounding IS-LM model like adjustment coefficients, depreciation of capital stock etc. have not been given due spotlight, given the audacity they possess to modulate system dynamics. In counteraction, we have investigated an augmented IS-LM model with two-time delays in capital accumulation equation. This model is subjected to linear and nonlinear arguments of investment, savings and liquidity function giving rise to M1(linear) and M2(nonlinear) models. They undergo hopf bifurcation for different values of delay parameters τ1 and τ2. Our study accentuates the following aspects(1) In a neophyte attempt, comparing the dynamics of a linear and nonlinear business cycle model in an environment as similar as possible, when τ1 and τ2 are the bifurcating parameters. (2) Parameter sensitivity analysis for both models. (3) Non linearity in savings function, which is a sparse event so far. Our findings reveal that (1) Non-linearity elevates system sensitivity and M2 model attains stability easily in the long run for dual delays, while for single delay M1 model has this feat. (2) M2 model encapsulates recurring cyclic behavior while M1 model is not capable of generating the same and demonstrates motifs of either stability or instability. (3) Parameter sensitivity analysis reveals that both the models are most vulnerable when (3a)Value of depreciation of capital stock is decreased. (3b) Money supply and propensities to investment are increased. (4) how aforementioned information can be utilized for crafting economic policies for linear/nonlinear economies, especially curated for their modus operandi. Numerical simulations follow.
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