Copyright (i) IFAC Computation in Economics, Finance and

Engineering: Economic Systems, Cambridge, UK, 1998

Stabilizing Chaotic Business Cycles Using a Neural Network

Taisei Kaizoji
International Christian University
Osawa Mitaka Tokyo, 181 JAPAN

Abstract
The purpose of this paper is to propose a bilt-in stabilizer that is, an automatically feedback control through the fine-tuning of
government spending and money supply, can stabilize chaotic endogenous business cycles, which would emerge from a standard
dynamic IS-LM model, on a unstable economic equilibrium. The nural network controller developed by Konish and Kokame
(1995) is used as the bilt-in stabilizer. The bilt-in stabilizer is identified by using a neural network trained by a Back Propagation
algorithm. The identification requires the observed economic data but does not require tl}e location of the unstable economic
equilibrium point and the local dynamics at the point. Copyright ~ 1998 IFAC
Keywords: chaotic business cycles, a bilt-in stabilizer, a neural network.

1. INTRODUCTION 2. A DYNAMIC KEYSIAN MODEL

The model is an discrete-time disequilibrium Keynesian

The time series of many macroeconomic variables have
the appearance of irregular fluctuations. The traditional
explanation of this is that an essentially stationary econ-
omy is subject to random shocks. Important examples
of this approach can be found in the works of Lucas and
Sargent (1981). They argues that when the economy is
subject to a sequence of random shocks, it will behave
in away wich resembles real-life business cycles.
An altanative way of treating the irregular fluctu-
ations would be to use a model involving non-linear dif-
ference (or differential) equations. IT a model of this sort
would exhibit chaotic or cyclic behavior, then it could
provide an exlanation of the irregular business cycles l .
Recent work of this approach are by Day and Shafer
(1985), who show how chaotic behavior can emerge in the
standard fix price macroeconomic model when induced
investment is strong enough. Their dynamic model is
reduced to a single first-order difference equation on na-
tional product. The chaotic business cycles that emerges
in their model are caused by non-linearities of demand
for money and investment.
The purpose of this paper is to propose a bilt-in stabi-
lizer that is, an automatically feedback control through
the fine-tuning of government spending and money sup-
ply, can stabilize chaotic endogenous business cycles,
which would emerge from a standard dynamic IS-LM
model, on a unstable economic equilibrium. The nu-
ral network controller developed by Konish and Kokame
(1995) is used as the bilt-in stabilizer. The bilt-in stabi-
lizer is identified by using a neural network trained by a
Back Propagation algorithm. The identification requires
the observed economic data but does not require the lo-
cation of the unstable economic equilibrium point and
the local dynamics at the point.
1 Usefulsurveys of the DOD-linear economic dynamics literature
can be found in Gabisch and Lorenz (1987).
309
(IS-LM) model, which has often been studied as one of
the basic models of endogenous business cycles, is for-
mulated as follows :
Y(t +1) - Y(t) =oIFI(Y(t),R(t),G(t)), (1)
R(t + 1) - R(t) =02F2(Y(t), R(t), M(t)), (2)
where R(t) denotes the interest rate at time t, Y(t) na-
tional product at time t, G(t) government expenditure
at time t, and M(t) the nominal money supply at time
t. Equations (1) and (2) represent traditional macroeco-
nomic disequilibrium adjustment processes for the com-
modities and money markets respectively. FI (.) repre-
sents excess demand for commodities and services and
F2 ( .) represents excess demand for money. 01 and 02
indicate the adjustment speed. In fixed price regimes,
each equation will be parametrized by the fixed price
level (fixed at unity).
We define FI (.) and F2(') as follows:
FI (Y(t), R(t), G(t)) = C(Y(t)) + J(Y(t), R(t))
+ G(t) - Y(t) , (3)
F2 (Y(t), R(t), M(t)) = L(Y(t), R(t)) - M(t) (4)
C(.), J(.), and L(.) are the consumption function , the
investment function, and the money demand function.
All functions are assumed to be linear in all arguments
except the money demand function which is assumed to
be log-linear in national product Y(t) and the interest
rate R(t).
Consumption function :
C(Y(t)) =0.8 +0.6Y(t)
Investment function :
J(Y(t), R(t)) =0.2 +0.2Y(t) - O.1R(t)
 Money demand function :
L(Y(t), R(t)) = exp(5 - R(t) + 0.2Y(t))
Adjustment speed: al =0.5 and a2 =0.7.
Assume that the policy makers keeps the government
spending and money supply constant until the next sec-
tion which regards stabilization policies.
. G(t) and M(t) are parameterized by the following
fixed values
G = 0.5 and M =4,
Under the above specification the economic system de-
scribed by (1) and (2) has the unique unstable equilib-
rium (Y', R') where Y' = 5.176 and R' = 4.649, The
eigenvalues evaluated at the unstable economic equilib-
rium (Y',R') are Al = -1.7896 and A2 = 0.889589.
Figure 1 shows a time path of national product, Y(t)
with the above parameters. The orbit is chaotic appear-
ently. For further analyses of the dynamics see Kaizoji
and Chang (1997).
y(t)
5.05
5 . 025
5 .
4.915
20 40 60 80 100 120
Time
Figure 1. Chaotic business cycles generated from the
dynamic Keynsian model.
3. A BILT-IN STABILIZER
Figure 1 shows that under the above specification the
national products Y(t) fluctuates irregularly below the
economic equilibrium level Y' = 5.176 when the policy
makers dose not implement any discretionary economic
policies.
In other words the chaotic business cycles are consid-
ered to have negative effect on economic welfare. Hence
the policy makers are expected to implement the discra-
tionary economic policies in order to stabilize the chaotic
business cycles to the economic equilibrium (Y', R·).
The policy makers have two discretionary policy instru-
ments, that is, a fiscal policy and a monetary policy.
These discretionary economic policies are defined as fol-
lows:
G(t) =G+ UI (t) and M(t) = M + U2(t) .
where UI (t) denotes the discretionary fiscaJ policy and
U2(t) the discretionary monetary policy.
However, the policy makers can not know the economic
structure F(.), so that they must somehow infer a opti-
mal discretionary policy functions, UI (t) and U2(t) from
the observed data Y(t) and R( t) . In this paper a neural
network is used to identify Ui(t),(i = 1,2).
For convinience of analysis let us rewrite the dynamic
system (1) and (2) as follows:
X(t + 1) = F(X(t)) + AU(t), (7)
(5)
X(t) = [Y(t),R(tW,
A =(a.,a2), U(t) =[UI(t),U2(t)jT.
The neural network is governed by
N
Ui(t) = !(Zi), Zj = LVijTj , Tj = !(OJ),
j=1
OJ = WjIY(t) + Wj2 R(t),
2
!(x) = -1.
1 +exp(-x)
Wj1 is the weight of the connection from Y(t), of the
input layer to the j th neuron of the hidden layer, Wj2
the weight of the connection from R( t), of the input layer
to the j th neuron of the hidden layer, and Vij the weight
of the connection from the j th neuron of the hidden layer
to the i th neuron of the output layer. These weights
are update to train Ui(t),(i = 1,2) by using Error back
propagation algorithm,
1 2
= -4 L([1 +!(Zi)][1 - !(Zi)]Vij
i=1
BE
x [1 + /(OJ)][l- /(OJ)]Y(t) IJUi(t»'
1 2
= -4 L([1 + /(zi)][l- /(Zi)]Vij
i=1
IJE
x [1 + /(OJ)][l- /(OJ)]R(t) IJUi(t)}'
where E is the error function and 11 is the learning rate.
Repeating the above updating, the error function E de-
creases to the minimum value.
As it is demonstrated below, Ui (t) ,(i = 1, 2) traind by
the above Error back propagation algotiyjm are able to
stabilize the chaotic business cycles automatically. Hence
Ui(t) is considered as a bilt-in stabilizer. Ui(t) which is
identified by the traind neural network is called the bilt~
(6) in stabiIizer below.
310
 The policy makers stabilize the chaotic business cycles.
At the same time they try to minimize changes of the
government spending and money supply. Therefore the
policy makers minimize the following two error functions
in order to find optimal bilt-in stbilizers. One of them
is an error function Ec corresponding to the distance
between X(t + 1) and X(t) .
neurons of the input layer, five neurons of the hidden
layer (N = 5), two neurons of the output layer. The
learning rate is IJ = 1 and the error weights are kc = 1
and ku =0.9.
y(t)

1
Ec = 2[X(t + 1) - X(tW[X(t + 1) - X(t)]. (8)

Another error function is Eu corresponding to the Eu-

clidean norm of the changes of economic policies AU(t),

Eu = ~[AU(tW[AU(t)]. (9)

The government makes the stabilization policies Ul (t)

20 40 60 80 100 120
and U2 (t) so as to minimizes the error E composed of
Ec and Eu, Time
E = kcEc + kuEu, (1O)
Figure 2. Stabilization of chaotic busines cycles on the
where kc and ku are the error weights for Ec and Eu, unstable economic equilibrium.
respectively.
The differential coefficient aE/aU(t) in Eq. (9) is 4. CONCLUDING REMARKS
given by
aE aEc aE A bilt-in stabilizer is proposed for stabilizing chaotic
aU(t) = kc aU(t) + ku aU(t) business cycles. The bilt-in stabilizer is identified by us-
ing the observed economic data. The identification does
= kcAT[F(X(t)) - X(t)] not require the information of the dynamically economic
+ (kc + ku)AT AU(t), (11) system such as the location of the unstable economic
equilibrium and the local dynamics at the point. There-
Each time the weights are updated using the error back fore the policy makers implements the stabilization poli-
propagation algorithm. After the bilt-in stabilizers is cies in order to stabilize chaotic business cycles using the
trained enough for the error E to be a minimum value, obseved data.
the bilt-in stabilizer U(t) can be described by It remains to be seen how the bilt-in stabilizer can
be extended to more general and perusable frameworks
U(t) = - 1 + k1u/kc A-l[F(X(t)) - X(t)]. (12) including the labor market and the international trade.

The derivation of Eq. (11) is demonstrated by Konishi

and Kokame (1995).
The dynamics of the economic system (7) at the eco-
nomic equilibrium point, X· is approximately governed
by
W+ 1) =H~(t) + AU(t), (13)
where W) = X(t) -X·. The bilt-in stabilizer U(t) which
is identified by the trained neural network can be also
approximately given by
U(t)=-I:(A-l(H-I)~(t), ((=ku/kc), (14)
where I is the 2 x 2 unit matrix. Substituting Eq. (13)
in Eq. (12), the linearized dynamics become
W + 1) = 1: ( ((H + I)~(t). (15)
Therefore the economic equilibrium becomes stable un-
der the appropreate rate of the error weights ku / kc·
Figure 2 shows a stabilized chaotic orbit of Y(t) by
the bilt-in stabilizer. The neural network consists of two
5. REFERENCE
[1] Day, Richard H. and Wayne Shafer, (1985), Keynesian
Chaos, Journal 0/ Macroeconomics, 7, 3, 277-295.
[2] Gabisch, G., and H. W. Lorenz, (1987) Business
Cyclys Theory, New York: Springer-Verlag.
[3] T. Kaizoji and C-S Chang (1997), "Chaotic Busi-
ness cycles and the Stabilization Policy in a Dynamic
Keynesian Model" , the Journal 0/ Social Science, Vol.35,
pp.41- 56.
[4] K. Konishii and H. Kokame (1995), "Stabilizing
and tracking unstable focus points in chaotic systems
using a neural netwoek", Physics Letters A 206,203-210.
[5] Lucus, R. E., Jr. and T. J. Sargent (eds.) (1981)
Rational Expectations and Econometric Practice, Min-
neapolis: University of Minnesota Press.

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