| Abstract: |
This paper argues that a linear statistical model with homoskedastic errors
cannot capture the nineteenth-century notion of a recurring cyclical pattern
in key economic aggregates. A simple nonlinear alternative is proposed and
used to illustrate that the dynamic behavior of unemployment seems to change
over the business cycle, with the unemployment rate rising more quickly than
it falls. Furthermore, many but not all economic downturns are also
accompanied by a dramatic change in the dynamic behavior of short-term
interest rates. It is suggested that these nonlinearities are most naturally
interpreted as resulting from short-run failures in the employment and credit
markets, and that understanding these short-run failures is the key to
understanding the nature of the business cycle. |