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Is the Macroeconomy Locally Unstable and Why Should We Care?

Beaudry, P; Galizia, D; Portier, F; (2017) Is the Macroeconomy Locally Unstable and Why Should We Care? NBER Macroeconomics Annual , 31 (1) pp. 479-530. 10.1086/690244. Green open access

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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 chapter, 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 interpretation 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 chapter with a discussion of the extent to which these two different views about the inherent dynamics of the macroeconomy may matter for policy.

Type: Article
Title: Is the Macroeconomy Locally Unstable and Why Should We Care?
Open access status: An open access version is available from UCL Discovery
DOI: 10.1086/690244
Publisher version: http://dx.doi.org/10.1086/690244
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10039993
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