Feedback dynamic control for exiting a debt-induced spiral in a deterministic Keen model.

Abstract

The Keen model is designed to represent an economy as a dynamic system governed by the interactions between private debt, wage share, and employment rate. When certain conditions are met, the model can lead to a debt spiral, which accurately mimics the impact of a financial crisis on an economy. This manuscript presents a recipe for breaking this spiral by expressing Keen's model as an affine nonlinear system that can be modified through policy interventions. We begin by considering critical initial conditions that resemble a financial crisis to achieve this goal. We then locate a desired point within the system's vector field that leads to a desirable equilibrium and design a path towards it. This path is later followed using one-step-ahead optimal control. We illustrate our approach by presenting simulated control scenarios.