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Imperfect Demand Expectations and Endogenous Business Cycles

Orlando Gomes ()

Zagreb International Review of Economics and Business, 2008, vol. 11, issue 1, 37-59

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 scenario); for each one of the models, we find that endogenous business cycles of various orders (regular and irregular) are observable.

Date: 2008
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