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Reviving the Limit Cycle View of Macroeconomic Fluctuations

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  • 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.

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  • 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
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    1. Reviving the limit cycle view of macroeconomic fluctuations
      by Christian Zimmermann in NEP-DGE blog on 2016-07-20 17:29:15

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    8. Bruce Fallick & Pawel Krolikowski, 2022. "Excess Persistence in Employment of Disadvantaged Workers," International Journal of Central Banking, International Journal of Central Banking, vol. 18(4), pages 1-52, October.
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    11. Barrales-Ruiz, Jose & Arnim, Rudiger von, 2021. "Endogenous fluctuations in demand and distribution: An empirical investigation," Structural Change and Economic Dynamics, Elsevier, vol. 58(C), pages 204-220.
    12. Orlando Gomes, 2016. "Exuberance and social contagion," Economics Bulletin, AccessEcon, vol. 36(3), pages 1705-1714.
    13. Gary Gorton & Guillermo Ordoñez, 2020. "Good Booms, Bad Booms," Journal of the European Economic Association, European Economic Association, vol. 18(2), pages 618-665.
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    15. 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.
    16. Orlando Gomes & J. C. Sprott, 2017. "Sentiment-driven limit cycles and chaos," Journal of Evolutionary Economics, Springer, vol. 27(4), pages 729-760, September.
    17. Vincent Sterk, 2016. "The Dark Corners of the Labor Market," Discussion Papers 1603, Centre for Macroeconomics (CFM).
    18. Nelson Lind, 2017. "Credit Regimes and the Seeds of Crisis," 2017 Meeting Papers 1474, Society for Economic Dynamics.
    19. Marco Pangallo, 2020. "Synchronization of endogenous business cycles," Papers 2002.06555, arXiv.org, revised Jun 2023.
    20. Silvo, Aino, 2017. "House prices, lending standards, and the macroeconomy," Research Discussion Papers 4/2017, Bank of Finland.
    21. Marco Pangallo, 2023. "Synchronization of endogenous business cycles," LEM Papers Series 2023/01, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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