How to Read Schumpeter's Gale: Macroeconomic Fluctuations as a Limit Cycle DOC
The Dynamic Stochastic General Equilibrium (DSGE) modeling framework has dominated the mainstream macroeconomic literature over the last few decades. This view of macroeconomic fluctuations leverages the Frisch-Slutsky impulse propagation paradigm and implies observed macroeconomic fluctuations are dynamic responses to economy-wide shocks. The absence of shocks implies no business cycle. This paper joins Beaudry, Galizia and Portier (2015) in calling for a revival of the limit cycle paradigm as an alternative to the Frisch-Slutsky paradigm in which observed macroeconomic fluctuations are a natural product of a dynamic competitive economy even in the absence of shocks. I propose a simple DSGE model in which depreciation is dynamic and not constant as I interpret depreciation, as its typically referred, also includes elements of obsolescence. This dynamic depreciation embodies Schumpeter’s vision of creative destruction as an “incessant”, integral part of capital accumulation. With this singular addition to a standard DSGE framework, a limit cycle is possible under generic calibrated parameters. Basic DSGE analysis supports this view of the macroeconomy.
