Working Paper: NBER ID: w22275
Authors: Paul Beaudry; Dana Galizia; Franck Portier
Abstract: In most modern macroeconomic models, the steady state (or balanced growth path) of the system is a local attractor, in the sense that, in the absence of shocks, the economy would converge to the steady state. In this paper, we examine whether the time series behavior of macroeconomic aggregates (especially labor market aggregates) is in fact supportive of this local-stability view of macroeconomic dynamics, or if it instead favors an alternative interpretation in which the macroeconomy may be better characterized as being locally unstable, with nonlinear deterministic forces capable of producing endogenous cyclical behavior. To do this, we extend a standard AR representation of the data to allow for smooth nonlinearities. Our main finding is that, even using a procedure that may have low power to detect local instability, the data provide intriguing support for the view that the macroeconomy may be locally unstable and involve limit-cycle forces. An interesting finding is that the degree of nonlinearity we detect in the data is small, but nevertheless enough to alter the description of macroeconomic behavior. We complete the paper with a discussion of the extent to which these two different views about the inherent dynamics of the macroeconomy may matter for policy.
Keywords: macroeconomics; local instability; limit cycles; nonlinear dynamics
JEL Codes: E24; E3; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local instability in the macroeconomy (E32) | traditional models may not accurately capture the dynamics of the economy (E19) |
| inclusion of nonlinearities in estimation process (C51) | shift from locally stable to locally unstable characterization of the system (C62) |
| inclusion of nonlinear terms (C51) | system switches from locally stable to locally unstable (C62) |
| presence of limit cycles (C62) | system may not converge to a steady state but oscillate between cycles of booms and busts (E32) |
| findings challenge the consensus view in macroeconomics (B22) | fluctuations are primarily due to exogenous shocks in an otherwise stable system (E32) |
| considering endogenous cyclical behavior (E32) | important in policy discussions (J18) |