Chaotic Behaviour in a Simple Model of Inflation.

A simple model of inflation is proposed. The model is set in discrete time and consists of a demand for money equation, a government budget constraint, and two alternative mechanisms for the formation of expectations of the inflation rate--adaptive expectations and rational expectations. It is shown that when expectations are adaptive the model can exhibit chaotic behavior for a range of plausible parameter values, but with rational expectations chaotic behavior is not possible. Copyright 1997 by Blackwell Publishers Ltd and The Victoria University of Manchester