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Growth Cycles

George Evans (), Seppo Honkapohja () and Paul Romer

No 5659, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We construct a rational expectations model in which aggregate growth alternates between a low growth and a high growth state. When all agents expect growth to be slow, the returns on investment are low, and little investment takes place. This slows growth and confirms the prediction that the returns on investment will be low. But if agents expect fast growth, investment is high, returns are high, and growth is rapid. This expectational indeterminacy is induced by complementarity between different types of capital goods. In a growth cycle there are stochastic shifts between high and low growth states and agents take full account of these transitions. The rules that agents need to form rational expectations in this equilibrium are simple. The equilibrium with growth cycles is stable under the dynamics implied by a correspondingly simple learning rule

JEL-codes: E3 O4 (search for similar items in EconPapers)
Date: 1996-07
Note: EFG
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Published as American Economic Review, Vol. 88, no. 3 (June 1998): 495-515.

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Journal Article: Growth Cycles (1998) Downloads
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