Stochastic Stability in Macro Models.

Stability in macro models may be attained by the addition of heteroskedastic shocks. This is illustrated by stabilizing the Harrod-Domar model in one dimension. In two dimensions, a saddle point is required and the method is applied to the Buiter-Miller model. Choosing broadly Keynesian and monetarist parameterizations, cyclical behavior is investigated on simulated data. The results indicate that Keynesian models are harder to stabilize. When stabilized, they possess cycles of four to five years and monetarist models with large shocks are comparable to the Keynesian model. Copyright 1989 by The London School of Economics and Political Science.