The adequacy of the traditional econometric approach to nonlinear cycles

Abstract

To show that the traditional econometric approach is not able to deal with deterministic chaos, we use an extension of Goodwin.s growth cycle model to generate arti.cial data for output. An EGARCH model is estimated to describe the data generation process. Although using some traditional econometric tests no evidence of misspeci.- cation is found the estimated process is qualitatively wrong: it is dynamically stable when the true process is unstable. We present a speci.c econometric procedure de- veloped to deal with deterministic chaos: the BDS statistics. Also an explanation for the little evidence of deterministic chaos in aggregated macroeconomic time series is suggested.