IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/21241.html
   My bibliography  Save this paper

Reviving the Limit Cycle View of Macroeconomic Fluctuations

Author

Listed:
  • Paul Beaudry
  • Dana Galizia
  • Franck Portier

Abstract

There is a long tradition in macroeconomics suggesting that market imperfections may explain why economies repeatedly go through periods of booms and busts, with booms sowing the seeds of the subsequent busts. This idea can be captured mathematically as a limit cycle. For several reasons, limit cycles play almost no role in current mainstream business cycle theory. In this paper we present both a general structure and a particular model with the aim of giving new life to this mostly dismissed view of fluctuations. We begin by showing why and when models with strategic complementarities—which are quite common in macroeconomics—give rise to unique equilibrium dynamics characterized by a limit cycle. We then develop and estimate a fully-specified dynamic general equilibrium model that embeds a demand complementarity to see whether the data favors a configuration supportive of a limit cycle. Booms and busts arise endogenously in our setting because agents want to concentrate their purchases of goods at times when purchases by others are high, since in such situations unemployment is low and therefore taking on debt is perceived as being less risky. A key feature of our approach is that we allow limit-cycle forces to compete with exogenous disturbances in explaining the data. Our estimation results indicate that US business cycle fluctuations in employment and output can be well explained by endogenous demand-driven cycles buffeted by technological disturbances that render those fluctuations irregular.

Suggested Citation

  • Paul Beaudry & Dana Galizia & Franck Portier, 2015. "Reviving the Limit Cycle View of Macroeconomic Fluctuations," NBER Working Papers 21241, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21241
    Note: EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w21241.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Edouard Challe & Xavier Ragot, 2016. "Precautionary Saving Over the Business Cycle," Economic Journal, Royal Economic Society, vol. 126(590), pages 135-164, February.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. Brock, William A. & Scheinkman, JoseA., 1976. "Global asymptotic stability of optimal control systems with applications to the theory of economic growth," Journal of Economic Theory, Elsevier, vol. 12(1), pages 164-190, February.
    4. Paul Beaudry & Dana Galizia & Franck Portier, 2018. "Reconciling Hayek’s and Keynes’ Views of Recessions," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 119-156.
    5. Greg Kaplan & Guido Menzio, 2016. "Shopping Externalities and Self-Fulfilling Unemployment Fluctuations," Journal of Political Economy, University of Chicago Press, vol. 124(3), pages 771-825.
    6. Christopher Carroll & Martin Sommer & Jiri Slacalek, 2012. "Dissecting Saving Dynamics; Measuring Wealth, Precautionary, and Credit Effects," IMF Working Papers 2012/219, International Monetary Fund.
    7. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    8. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    9. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
    10. Wouter den Haan & Markus Riegler & Pontus Rendahl, 2014. "Unemployment (fears), precautionary savings, and aggregate demand," 2014 Meeting Papers 1062, Society for Economic Dynamics.
    11. Boldrin, Michele & Montrucchio, Luigi, 1986. "On the indeterminacy of capital accumulation paths," Journal of Economic Theory, Elsevier, vol. 40(1), pages 26-39, October.
    12. Ravn, Morten O. & Sterk, Vincent, 2017. "Job uncertainty and deep recessions," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 125-141.
    13. repec:pri:cepsud:234kaplan is not listed on IDEAS
    14. Boldrin, Michele & Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A dynamic equilibrium model of search, production, and exchange," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 723-758.
    15. Alexandre Scheinkman, Jose, 1976. "On optimal steady states of n-sector growth models when utility is discounted," Journal of Economic Theory, Elsevier, vol. 12(1), pages 11-30, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Reviving the limit cycle view of macroeconomic fluctuations
      by Christian Zimmermann in NEP-DGE blog on 2016-07-20 17:29:15

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Florian Sniekers, 2018. "Persistence And Volatility Of Beveridge Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 665-698, May.
    2. Julien Prat & Boyan Jovanovic, 2015. "Reputation Cycles," 2015 Meeting Papers 971, Society for Economic Dynamics.
    3. Florian Pelgrin & Alain Venditti, 2020. "On the long-run fluctuations of inheritance in two-sector OLG models," AMSE Working Papers 2048, Aix-Marseille School of Economics, France.
    4. Golosov, Mikhail & Menzio, Guido, 2020. "Agency business cycles," Theoretical Economics, Econometric Society, vol. 15(1), January.
    5. Sterk, Vincent, 2016. "The dark corners of the labor market," LSE Research Online Documents on Economics 86244, London School of Economics and Political Science, LSE Library.
    6. Bruce Fallick & Pawel Krolikowski, 2019. "Excess Persistence in Employment of Disadvantaged Workers," Working Papers 201801R, Federal Reserve Bank of Cleveland.
    7. George-Marios Angeletos, 2018. "Frictional Coordination," Journal of the European Economic Association, European Economic Association, vol. 16(3), pages 563-603.
    8. Orlando Gomes, 2016. "Exuberance and social contagion," Economics Bulletin, AccessEcon, vol. 36(3), pages 1705-1714.
    9. Gary Gorton & Guillermo Ordoñez, 2020. "Good Booms, Bad Booms," Journal of the European Economic Association, European Economic Association, vol. 18(2), pages 618-665.
    10. Roxana Mihet & Laura Veldkamp, 2016. "Comment on "Is the Macroeconomy Locally Unstable and Why Should We Care?"," NBER Chapters, in: NBER Macroeconomics Annual 2016, Volume 31, pages 531-539, National Bureau of Economic Research, Inc.
    11. Orlando Gomes & J. C. Sprott, 2017. "Sentiment-driven limit cycles and chaos," Journal of Evolutionary Economics, Springer, vol. 27(4), pages 729-760, September.
    12. Vincent Sterk, 2016. "The Dark Corners of the Labor Market," Discussion Papers 1603, Centre for Macroeconomics (CFM).
    13. Nelson Lind, 2017. "Credit Regimes and the Seeds of Crisis," 2017 Meeting Papers 1474, Society for Economic Dynamics.
    14. Marco Pangallo, 2020. "Synchronization of endogenous business cycles," Papers 2002.06555, arXiv.org.
    15. Silvo, Aino, 2017. "House prices, lending standards, and the macroeconomy," Research Discussion Papers 4/2017, Bank of Finland.
    16. Gobbi, Alessandro & Grazzini, Jakob, 2019. "A basic New Keynesian DSGE model with dispersed information: An agent-based approach," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 101-116.
    17. Moritz Schularick & Lucas ter Steege & Felix Ward, 2020. "Leaning against the Wind and Crisis Risk," CESifo Working Paper Series 8484, CESifo.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Paul Beaudry & Dana Galizia & Franck Portier, 2018. "Reconciling Hayek’s and Keynes’ Views of Recessions," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 119-156.
    2. Jonathan Heathcote & Fabrizio Perri, 2018. "Wealth and Volatility," Review of Economic Studies, Oxford University Press, vol. 85(4), pages 2173-2213.
    3. Edouard Challe & Julien Matheron & Xavier Ragot & Juan F. Rubio‐Ramirez, 2017. "Precautionary saving and aggregate demand," Quantitative Economics, Econometric Society, vol. 8(2), pages 435-478, July.
    4. Brendon, Charles & Corsetti, Giancarlo, 2016. "COEURE Survey: Fiscal and Monetary Policies after the Crises," CEPR Discussion Papers 11088, C.E.P.R. Discussion Papers.
    5. Sniekers, F.J.T., 2013. "Endogenous Beveridge cycles and the volatility of unemployment," CeNDEF Working Papers 13-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    6. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 261-282, October.
    7. Sterk, Vincent, 2016. "The dark corners of the labor market," LSE Research Online Documents on Economics 86244, London School of Economics and Political Science, LSE Library.
    8. Kiyotaki, Nobuhiro & Lagos, Ricardo & Wright, Randall, 2016. "Introduction to the symposium issue on money and liquidity," Journal of Economic Theory, Elsevier, vol. 164(C), pages 1-9.
    9. Vincent Sterk, 2016. "The Dark Corners of the Labor Market," Discussion Papers 1603, Centre for Macroeconomics (CFM).
    10. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    11. Rocheteau, Guillaume & Wright, Randall, 2013. "Liquidity and asset-market dynamics," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 275-294.
    12. Qian Chen & Christoffer Koch & Padma Sharma & Gary Richardson, 2020. "Payments Crises and Consequences," NBER Working Papers 27733, National Bureau of Economic Research, Inc.
    13. Mitra, Tapan & Nishimura, Kazuo, 2001. "Discounting and Long-Run Behavior: Global Bifurcation Analysis of a Family of Dynamical Systems," Journal of Economic Theory, Elsevier, vol. 96(1-2), pages 256-293, January.
    14. Ellison, Martin & Macaulay, Alistair, 2019. "A Rational Inattention Unemployment Trap," CEPR Discussion Papers 13761, C.E.P.R. Discussion Papers.
    15. Florian Sniekers, 2018. "Persistence And Volatility Of Beveridge Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 665-698, May.
    16. Guillaume Rocheteau & Tai-Wei Hu & Lucie Lebeau & Younghwan In, . "Gradual Bargaining in Decentralized Asset Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    17. Nejat Anbarci & Richard Dutu & Ching‐Jen Sun, 2019. "On The Timing Of Production Decisions In Monetary Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(1), pages 447-472, February.
    18. Ricardo Lagos & Guillaume Rocheteau, 2009. "Liquidity in Asset Markets With Search Frictions," Econometrica, Econometric Society, vol. 77(2), pages 403-426, March.
    19. Thorsten Hens & Klaus Reiner Schenk-Hopp… & Bodo Vogt, 2007. "The Great Capitol Hill Baby Sitting Co-op: Anecdote or Evidence for the Optimum Quantity of Money?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(6), pages 1305-1333, September.
    20. M. Marena & L. Montrucchio, 1999. "Neighborhood Turnpike Theorem for Continuous-Time Optimization Models," Journal of Optimization Theory and Applications, Springer, vol. 101(3), pages 651-676, June.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:21241. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.