Limit Cycles in Japanese Macroeconomic Data: Policy Implications from he View of Business Cycles

Abstract

This paper examines the existence of limit cycles in Japanese macroeconomic variables using a threshold autoregressive (TAR) model. Recent business cycle theories are grouped into two main categories: (1) real business cycle and (2) endogenous business cycle. Real business cycle theory, which is modelled by an autoregressive (AR) model, has a linear dynamic system with consecutive exogenous shocks that cause cyclical deviations from a growth trend. On the other hand, endogenous business cycle theory, which includes limit cycles characterized by a TAR model, is based on a nonlinear dynamic system that has a mechanism that induces complicated economic fluctuations endogenously. Which theory is appropriate has significant implications for policy makers. Accordingly, it is necessary to investigate whether economic fluctuations depend on an endogenous mechanism or on exogenous shocks. To investigate this, we test for linearity in Japanese macroeconomic variables. The linearity test in the paper distinguishes the TAR model from the AR model. We find that most fluctuations have TAR processes. The results indicate that most Japanese macroeconomic data have limit cycles, and imply that the government could control the business cycle in Japan, even though the cyclical behaviour is extremely complicated.