Let it be: chaotic price instability can be beneficial

This study investigates an economic implication of chaotic fluctuations generated by a,discrete price adjustment process. For this purpose, it uses a pure exchange model with two goods and two consumers in which chaotic price fluctuations can arise. In order to reveal some statistical properties of such price dynamics, this study constructs a density function of chaotic trajectory, calculates a long-run average utility, and then-compares it with the utility corresponding to a stationary state. The following two results are analytically as well as numerically demonstrated: (1) chaotic price dynamics can be beneficial for one consumer and harmful to the other consumer and (2) the whole economy is possibly better off along chaotic fluctuations than at a stationary state in the long-run. Further, it is shown that the second result is sensitive to the social judgement on the ranking of consumers' utilities. These results imply the possibility that chaotic fluctuations can be preferable to a stationary. state. (C) 2003 Elsevier Science Ltd. All rights reserved.