TY - JOUR AU - Beaudry, Paul AU - Galizia, Dana AU - Portier, Franck TI - Is the Macroeconomy Locally Unstable and Why Should We Care? JF - National Bureau of Economic Research Working Paper Series VL - No. 22275 PY - 2016 Y2 - May 2016 DO - 10.3386/w22275 UR - http://www.nber.org/papers/w22275 L1 - http://www.nber.org/papers/w22275.pdf N1 - Author contact info: Paul Beaudry Bank of Canada 234 Wellington Street Ottawa, ON, K1A 0G9 CANADA E-Mail: Paul.Beaudry@ubc.ca Dana S. Galizia Department of Economics, Carleton University Room B-845, Loeb Building 1125 Colonel By Drive Ottawa, ON K1S 5B6 Canada Tel: 613-520-2600 x7454 E-Mail: dana.galizia@gmail.com Franck Portier Department of Economics University College London 30 Gordon Street WC1H 0AX London United Kingdom E-Mail: f.portier@ucl.ac.uk M1 - published as Paul Beaudry, Dana Galizia, Franck Portier. "Is the Macroeconomy Locally Unstable and Why Should We Care?," in Martin Eichenbaum and Jonathan A. Parker, editors, "NBER Macroeconomics Annual 2016, Volume 31" University of Chicago Press (2017) M3 - presented at "31st Annual Conference on Macroeconomics", April 15-16, 2016 AB - In most modern macroeconomic models, the steady state (or balanced growth path) of the system is a local attractor, in the sense that, in the absence of shocks, the economy would converge to the steady state. In this paper, we examine whether the time series behavior of macroeconomic aggregates (especially labor market aggregates) is in fact supportive of this local-stability view of macroeconomic dynamics, or if it instead favors an alternative interpretation in which the macroeconomy may be better characterized as being locally unstable, with nonlinear deterministic forces capable of producing endogenous cyclical behavior. To do this, we extend a standard AR representation of the data to allow for smooth nonlinearities. Our main finding is that, even using a procedure that may have low power to detect local instability, the data provide intriguing support for the view that the macroeconomy may be locally unstable and involve limit-cycle forces. An interesting finding is that the degree of nonlinearity we detect in the data is small, but nevertheless enough to alter the description of macroeconomic behavior. We complete the paper with a discussion of the extent to which these two different views about the inherent dynamics of the macroeconomy may matter for policy. ER -