The chaos theory has been paid special attention in the fields of social sciences as well as in the various fields of natural sciences since its origination from meteorology in the 1960's. Chaos means that the pattern of motion appears to be random, but is fixed in its past and future trajectory by its underlying deterministic system.
The chaos theory has tried to explain the unpredictable behavior of stock price and economic variables in economics since the 1980's. The theoretical studies on these areas examine how the chaotic behavior can be formed from nonlinear equations. The empirical studies mainly focus on testing the existence of the deterministic chaos or the nonlinearity in macroeconomic variables.
This paper explicates the evidence of nonlinearity through the examination of Korean macroeconomic variables such as GNP, unemployment rate, pig-iron production, and gross domestic private investment by the testing methods of BDS, correlation dimension estimation, residual test, and shuffling test. The results show some evidence of nonlinearity in GNP and pig-iron production.
