A two regime model of inflation and unemployment fluctuations

In this paper we present a formal definition of the notions of economic regime and regime dynamics. Starting from these definitions, we discuss a multiple regime dynamic model generating an endogenous unemployment-price adjustment mechanism. Two different employment regimes are introduced and the regime dynamics properties of the model are analyzed. Specifically, we assume that the equations governing employment and prices dynamics undergo a discontinuous change in regime when a critical value of unemployment rate is reached. Depending on parameter values, we show that this model is capable of producing a rich variety of dynamic behavior, including complex irregular fluctuations. The main result of this paper is the representation of the regime dynamics via symbolic dynamics. In particular, we show that the regime dynamics of the model can be represented by a shift of finite type that depends on parameter values. In some particular cases, we can also have a representation via directed vertex graphs. An important consequence of this is the possibility of measuring the complexity of the model by using the entropy measure.