Reviving the Limit Cycle View of Macroeconomic Fluctuations

Abstract

for comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w21241.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Is the Macroeconomy Locally Unstable and Why Should We Care?

“…It is quite interesting that such a simple specification, which was motivated from our previous theoretical analysis (see Beaudry, Galizia, and Portier [2015b]), displays a limit cycle. We will document later using Monte Carlo methods that this result is unlikely to be an artifact of our data treatment.…”

“…For example, in our previous work (Beaudry, Galizia, and Portier [2015b]), we have emphasized the role of strategic complements in producing limit cycles. An effective stabilization policy in such a situation is one that reduces these complementarities.…”

“…Second, it allows for more distant lags to play a role (through X t−1 ) without requiring the estimation of too many extra parameters. We should emphasize that our inclusion of an accumulation term of this form is motivated by the class of models presented in Beaudry, Galizia, and Portier [2015b] where the emergence of limit cycles is shown to be a possibility.…”

“…33 In our previous work (Beaudry, Galizia, and Portier [2015b]) we presented a structural model where limit cycles arose as the result of a complementarity in consumption decisions generated by imperfect unemployment Notes: For each model, we derive parameter distributions by bootstrapping with 1,000 replications. Then, for each value of σ , we simulate T tot = T brn + T periods of data, with T brn = 1,000 and T = 100,000.…”

“…Second, when looking at the time series behavior of many labor market variables (such as the employment rate, the unemployment rate, or the job finding rate), the estimated impulse response functions 1 Although the idea of endogenous boom and bust cycles has a long tradition in the economics literature (Kalecki [1937], Kaldor [1940], Hicks [1950], Goodwin [1951]), it is not present in most modern macro-models. Recent exceptions are Myerson [2012], Matsuyama [2013], Gu, Mattesini, Monnet, and Wright [2013] and Beaudry, Galizia, and Portier [2015b]. 1 indicate that these variables respond to shocks in a manner suggestive of a stable system.…”