Evidence and Ideology in Macroeconomics: The Case of Investment Cycles

54 Pages Posted: 4 Oct 2005

Date Written: March 2005


The paper reports the principal findings of a long term research project on the description and explanation of business cycles. The research strongly confirmed the older view that business cycles have large systematic components that take the form of investment cycles. These quasi-periodic movements can be represented as low order, stochastic, dynamic processes with complex eigenvalues. Specifically, there is a fixed investment cycle of about 8 years and an inventory cycle of about 4 years. Maximum entropy spectral analysis was employed for the description of the cycles and continuous time econometrics for the explanatory models. The central explanatory mechanism is the second order accelerator, which incorporates adjustment costs both in relation to the capital stock and the rate of investment. By means of parametric resonance it was possible to show, both theoretically and empirically how cycles aggregate from the micro to the macro level. The same mathematical tool was also used to explain the international convergence of cycles. I argue that the theory of investment cycles was abandoned for ideological, not for evidential reasons. Methodological issues are also discussed.

Keywords: Continuous time econometrics, investment cycle, inventory cycle, maximum entropy spectral analysis, parametric resonance

JEL Classification: E32, C32, C50

Suggested Citation

Hillinger, Claude, Evidence and Ideology in Macroeconomics: The Case of Investment Cycles (March 2005). Available at SSRN: https://ssrn.com/abstract=814527 or http://dx.doi.org/10.2139/ssrn.814527

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