Imperfect Demand Expectations and Endogenous Business Cycles

Orlando Gomes

No 127, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: Optimal growth models aim at explaining long run trends of growth under the strong assumption of full efficiency in the allocation of resources. As a result, the steady state time paths of the main economic aggregates reflect constant, exogenous or endogenous, growth. To introduce business cycles in this optimality structure one has to consider some source of inefficiency. By assuming that firms adopt a simple non optimal rule to predict future demand, we let investment decisions to depart from the ones that would guarantee the total efficiency outcome. The new investment hypothesis is considered under three growth setups (the simple one equation Solow model of capital accumulation, the Ramsey model with consumption utility maximization, and a two sector endogenous growth setup); for each one of the models, we find that endogenous business cycles of various orders (regular and irregular) are observable

Keywords: Endogenous business cycles; Nonlinear dynamics; Growth models; Bifurcation analysis. (search for similar items in EconPapers)
JEL-codes: C61 E32 O41 (search for similar items in EconPapers)
Date: 2007-02-02
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:mmf:mmfc06:127

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