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Is the Macroeconomy Locally Unstable and Why Should We Care?

Franck Portier (), Dana Galizia () and Paul Beaudry ()

No 321, 2016 Meeting Papers from Society for Economic Dynamics

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 times series behavior of macroeconomic aggregates (especially labor market aggregates) are in fact supportive of this locally stability view of macroeconomic dynamics or if they instead favor an alternative interpretation whereby the macro-economy may be better characterized as a locally unstable system with deterministic forces that support limit cycle behavior. To do this, we extend standard AR representations of the data to allow for smooth non-linearities using polynomials. Our main finding is that, even using a procedure which may have low power, the data provide considerable support to the view that the macro-economy may be locally unstable. An interesting finding is that the amount of non-linearity we detect in the data is rather minor but it is enough to alter the description of macroeconomic behavior. We also discuss the extent to which these two different views about the inherent dynamics of the macro-economy may matter for policy.

New Economics Papers: this item is included in nep-cse and nep-fdg
Date: 2016
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https://economicdynamics.org/meetpapers/2016/paper_321.pdf (application/pdf)

Related works:
Journal Article: Is the Macroeconomy Locally Unstable and Why Should We Care? (2017) Downloads
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) Downloads
Working Paper: Is the Macroeconomy Locally Unstable and Why Should We Care? (2016) Downloads
Working Paper: Is the Macroeconomy Locally Unstable and Why Should We Care? (2016) Downloads
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