Searching for Endogenous Business Cycles in the U.S. Postwar Economy

Metroeconomica 47, February 1996: 34-57

This paper explores the possibility that booms and busts are endogenous with an econometric examination of the U.S. economy. Although existing empirical results suggests the contrary, a theoretical literature discounts the stability verdict on the grounds that it is based on linear econometric evidence that is unreliable when the underlying phenomenon is nonlinear. We study a simple Keynesian cycle model that is theoretically general enough to include convergence to equilibrium or endogenous cycles as special cases. We find one particular nonlinear econometric specification that exhibits a limit cycle when estimated on postwar data, while the estimate of its global linear approximation converges to a fixed equilibrium. Our results are an empirical investigation of the boundary between stability and instability.