Chapter 6 - Endogenous fluctuations

Summary

INTRODUCTION

Economic time series usually display deviations from their trends that, although irregular, have recurrent patterns. The explanation of such patterns of fluctuations is a subject that has received considerable attention from the economics profession.

Fluctuations may be generated by economic shocks that are due either to variations of private sector behavior originating in tastes or technological changes or to stochastic shifts in government policy. Under such an hypothesis, the variables subject to shocks will be modeled as exogeneous uncertain parameters. Typically, in exogenous shock models of economic fluctuations, the equilibrium is well defined, often unique - at least locally unique, in the terminology we will adopt later determinate - and stable: in the absence of recurrent exogenous shocks, the economy would tend to a steady state, but because of shocks a (possibly stationary) pattern of fluctuations will be observed.

Such a general structure of explanation is so familiar that some typologies of business cycle theories only refer to it, and classify models according, on the one hand, to the dominant type of “impulse” and, on the other hand, to the nature of “propagation mechanisms” that are posited. Textbook models, either "Keynesian" or “monetarist,” describe exogenously generated fluctuations. Also, the recent theory of “real business cycles” is the last avatar of a popular exogenous shock theory.