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Reviving the limit cycle view of macroeconomic fluctuations

Author

Listed:
  • Franck Portier

    (Toulouse School of Economics)

  • Dana Galizia

    (University of British Columbia)

  • Paul Beaudry

    (University of British Columbia)

Abstract

There is a long tradition in macroeconomics suggesting that market imperfections may explain why economies repeatedly go through periods of booms and busts. This idea can be captured mathematically as a limit cycle. 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 can give rise to unique-equilibrium dynamics characterized by a limit cycle. We then develop a fully-specified dynamic general equilibrium model that embeds a demand complementarity that allows for 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

  • Franck Portier & Dana Galizia & Paul Beaudry, 2016. "Reviving the limit cycle view of macroeconomic fluctuations," 2016 Meeting Papers 52, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:52
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    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.
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    7. 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.
    8. Wouter den Haan & Markus Riegler & Pontus Rendahl, 2014. "Unemployment (fears), precautionary savings, and aggregate demand," 2014 Meeting Papers 1062, Society for Economic Dynamics.
    9. 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.
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    12. Ravn, Morten O. & Sterk, Vincent, 2017. "Job uncertainty and deep recessions," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 125-141.
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    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

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    Cited by:

    1. 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.
    2. Julien Prat & Boyan Jovanovic, 2015. "Reputation Cycles," 2015 Meeting Papers 971, Society for Economic Dynamics.
    3. Mikhail Golosov & Guido Menzio, 2015. "Agency Business Cycles," NBER Working Papers 21743, National Bureau of Economic Research, Inc.
    4. 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.
    5. Orlando Gomes, 2016. "Exuberance and social contagion," Economics Bulletin, AccessEcon, vol. 36(3), pages 1705-1714.
    6. Guillermo Ordonez & Gary Gorton, 2015. "Good Booms, Bad Booms," 2015 Meeting Papers 292, Society for Economic Dynamics.
    7. 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.
    8. repec:spr:joevec:v:27:y:2017:i:4:d:10.1007_s00191-017-0497-5 is not listed on IDEAS
    9. George-Marios Angeletos, 2017. "Frictional Coordination," NBER Working Papers 24178, National Bureau of Economic Research, Inc.
    10. Vincent Sterk, 2016. "The Dark Corners of the Labor Market," Discussion Papers 1603, Centre for Macroeconomics (CFM).
    11. Nelson Lind, 2017. "Credit Regimes and the Seeds of Crisis," 2017 Meeting Papers 1474, Society for Economic Dynamics.
    12. Silvo, Aino, 2017. "House prices, lending standards, and the macroeconomy," Research Discussion Papers 4/2017, Bank of Finland.

    More about this item

    JEL classification:

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

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