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Imperfect Demand Expectations and Endogenous Business Cycles

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  • Orlando Gomes

    (Escola Superior de Comunicacao Social, Campus de Benfica do IPL, Lisbon, Portugal)

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.

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Bibliographic Info

Article provided by Faculty of Economics and Business, University of Zagreb in its journal Zagreb International Review of Economics and Business.

Volume (Year): 11 (2008)
Issue (Month): 1 (May)
Pages: 37-59

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Handle: RePEc:zag:zirebs:v:11:y:2008:i:1:p:37-59

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  1. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Jean-Pierre DANTHINE & John B. DONALDSON & Thore JOHNSEN, 1997. "Productivity Growth, Consumer Confidence and the Business Cycle," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9711, Université de Lausanne, Faculté des HEC, DEEP.
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  12. repec:cup:macdyn:v:6:y:2002:i:5:p:633-64 is not listed on IDEAS
  13. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
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  15. Day, Richard H, 1982. "Irregular Growth Cycles," American Economic Review, American Economic Association, vol. 72(3), pages 406-14, June.
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