Journal Article

Adaptive forecasts, hysteresis, and endogenous fluctuations

Abstract: This paper considers fluctuations and policy in an economic model with multiple steady states due to a production externality. In the absence of policy changes, the driving forces generating fluctuations are exogenous random productivity shocks. However, because there are multiple steady states, large productivity shocks can shift the economy between high-and low- level equilibria, providing an additional endogenous source of fluctuations. The scope for macroeconomic policy is large since changes in policy can also shift the economy between equilibria. In this setting macroeconomic policy exhibits hysteresis (irreversibilities) and threshold effects and can be used to eliminate endogenous fluctuations.

Keywords: Econometric models; Business cycles;

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Economic Review

Publication Date: 1993

Pages: 3-13

Order Number: 1