IMPLEMENTATION CYCLES, INVESTMENT, AND GROWTH

Patrick Francois () and Huw Lloyd-Ellis ()

International Economic Review, 2008, vol. 49, issue 3, pages 901-942

Abstract: We develop a model of "intrinsic" cycles, driven by the decentralized behavior of entrepreneurs and firms making continuous, divisible improvements in their productivity. We show that when the introduction of productivity improvements is endogenous, implementation cycles arise even in the presence of reversible investment and consumption smoothing. The implied cyclical equilibrium is unique within its class and shares several features in common with actual business cycles. In particular, its predictions are qualitatively consistent with the joint behavior of the investment rate and Tobin's Q during U.S. recessions. Copyright © 2008 the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2008

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