Is the Macroeconomy Locally Unstable and Why Should We Care?

Beaudry, Paul, Galizia, Dana and Portier, Franck (2017) Is the Macroeconomy Locally Unstable and Why Should We Care? In: NBER Macroeconomics Annual 2016: volume 31 University of Chicago Press. pp. 479-530. ISBN 978-0226490199

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Official URL: http://tse-fr.eu/pub/31502

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.

Item Type: Book Section
Language: English
Date: May 2017
Uncontrolled Keywords: Macroeconomic Fluctuations, Limit Cycle, Unemployment
JEL codes: E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E3 - Prices, Business Fluctuations, and Cycles
E32 - Business Fluctuations; Cycles
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 24 Feb 2017 09:32
Last Modified: 29 Mar 2018 15:32
OAI ID: oai:tse-fr.eu:31502
URI: http://publications.ut-capitole.fr/id/eprint/23073

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