Evidence and Ideology in Macroeconomics: The Case of Investment Cycles
AbstractThe paper reports the principal findings of a long term research project on the description and explanation of business cycles. The research strongly confirmed the older view that business cycles have large systematic components that take the form of investment cycles. These quasi-periodic movements can be represented as low order, stochastic, dynamic processes with complex eigenvalues. Specifically, there is a fixed investment cycle of about 8 years and an inventory cycle of about 4 years. Maximum entropy spectral analysis was employed for the description of the cycles and continuous time econometrics for the explanatory models. The central explanatory mechanism is the second order accelerator, which incorporates adjustment costs both in relation to the capital stock and the rate of investment. By means of parametric resonance it was possible to show, both theoretically and empirically how cycles aggregate from the micro to the macro level. The same mathematical tool was also used to explain the international convergence of cycles. I argue that the theory of investment cycles was abandoned for ideological, not for evidential reasons. Methodological issues are also discussed.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 694.
Date of creation: Oct 2005
Date of revision:
business cycle; continuous time econometrics; investment cycle; inventory cycle; maximum entropy spectral analysis; parametric resonance;
Find related papers by JEL classification:
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-08 (All new papers)
- NEP-HPE-2005-10-08 (History & Philosophy of Economics)
- NEP-MAC-2005-10-08 (Macroeconomics)
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