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Random Walks and Non-Linear Paths in Macroeconomic Time Series: Some Evidence and Implications

Franco Bevilacqua () and Adriaan van Zon ()
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Franco Bevilacqua: MERIT, Maastricht University

Working Papers from Vienna University of Economics and Business Research Group: Growth and Employment in Europe: Sustainability and Competitiveness

Abstract: This paper investigates whether the inherent non-stationarity of macroeconomic time series is entirely due to a random walk or also to non-linear components. Applying the numerical tools of the analysis of dynamical systems to long time series for the US, we reject the hypothesis that these series are generated solely by a linear stochastic process. Contrary to the Real Business Cycle theory that attributes the irregular behavior of the system to exogenous random factors, we maintain that the fluctuations in the time series we examined cannot be explained only by means of external shocks plugged into linear autoregressive models. A dynamical and non-linear explanation may be useful for the double aim of describing and forecasting more accurately the evolution of the system. Linear growth models that find empirical verification on linear econometric analysis, are therefore seriously called in question. Conversely non-linear dynamical models may enable us to achieve a more complete information about economic phenomena from the same data sets used in the empirical analysis which are in support of Real Business Cycle Theory. We conclude that Real Business Cycle theory and more in general the unit root autoregressive models are an inadequate device for a satisfactory understanding of economic time series. A theoretical approach grounded on non-linear metric methods, may however allow to identify non-linear structures that endogenously generate fluctuations in macroeconomic time series.

Keywords: Random Walks; Real Business Cycle Theory; Chaos (search for similar items in EconPapers)
JEL-codes: C22 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets
Date: 2002-05
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Chapter: Random walks and non-linear paths in macroeconomic time series: some evidence and implications (2004) Downloads
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