Is the macroeconomy locally unstable and why should we care?
In most modern macroeconomiCmodels, the steady state (or balanced growthpath) of the systeMis a local attractor, in the sense that, in the absence of shocks, the economy would converge to the steady state. In this chapter, we examine whether the time-series behavior of macroeconomiCaggregates (especially labor market aggregates) is in fact supportive of this local-stability view of macroeconomiCdynamics, or if it instead favors an alternative interpretation in whichthe macroeconomy may be better characterized as being locally unstable, withnonlinear deterministiCforces capable of producing endogenous cyclical behavior. To do this, we extend a standard AR representation of the data to allow for smoothnonlinearities. 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 enoughto alter the description of macroeconomiCbehavior. We complete the chapter witha discussion of the extent to whichthese two different views about the inherent dynamics of the macroeconomy may matter for policy.