New paper : Putting the Cycle Back into Business Cycle Analysis

lcfI have posted on my “current work” page a new paper with Paul Beaudry  and Dana Galizia “Putting the Cycle Back into Business Cycle Analysis“. As written in the abstract,

This paper begins by re-examining the spectral properties of several cyclically sensitive variables such as hours worked, unemployment and capacity utilization. For each of these series, we document the presence of an important peak in the spectral density at a periodicity of approximately 36-40 quarters. We take this pattern as suggestive of intriguing but little-studied cyclical phenomena at the long end of the business cycle, and we ask how best to explain it. In particular, we explore whether such patterns may reflect slow-moving limit cycle forces, wherein booms sow the seeds of the subsequent busts. To this end, we present a general class of models, featuring local complementarities, that can give rise to unique-equilibrium behavior characterized by stochastic limit cycles. We then use the framework to extend a New Keynesian-type model in a manner aimed at capturing the notion of an accumulation-liquidation cycle. We estimate the model by indirect inference and find that the cyclical properties identified in the data can be well explained by stochastic limit cycles forces, where the exogenous disturbances to the system are very short lived. This contrasts with results from most other macroeconomic models, which typically require very persistent shocks in order to explain macroeconomic fluctuations.

Key Words are Business Cycle, Limit Cycle.

JEL Classification code are E3, E32, E24.

Note : The paper is  a heavily revised version of a paper previously circulated under the heading “Reviving the Limit Cycle View of Macroeconomic Fluctuations.”

An online appendix can also be found on my “current work” page

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