Is the Macroeconomy Locally Unstable and Why Should We Care?

Paul Beaudry, Dana Galizia and Franck Portier ()

No 16-736, TSE Working Papers from Toulouse School of Economics (TSE)

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 inter- pretation 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: Macroeconomic Fluctuations; Limit Cycle; Unemployment (search for similar items in EconPapers)
JEL-codes: E24 E3 E32 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Chapter: Is the Macroeconomy Locally Unstable and Why Should We Care? (2016)
Working Paper: Is the Macroeconomy Locally Unstable and Why Should We Care? (2016)
Working Paper: Is the Macroeconomy Locally Unstable and Why Should We Care? (2016)
Working Paper: Is the Macroeconomy Locally Unstable and Why Should We Care? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:31201

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