Recursive Factor of Production Interrelations and Endogenous Cycling.

A multivariate linear rational expectations equilibrium version of the Lucas-Prescott investment model is developed to study the behavior of factors of productions with recursive interrelations. The connection between these interrelations and endogenous cycling is established in a testable way. Maximum likelihood estimates, using annual postwar aggregate U.S. manufacturing data, provide strong evidence of capital-labor interrelations that induce a labor overshooting type of endogenous cycling. This raises questions for the methodology of current real business cycle models which rule out the possibility of such interrelations. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.