Endogenous Business Cycles in the Ramsey Growth Model

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Endogenous Business Cycles in the Ramsey Growth Model

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Orlando Gomes (Escola Superior de Comunicacao Social (Instituto Politecnico de Lisboa) and Unidade de Investigacao em Desenvolvimento Empresarial (UNIDE/ISCTE))

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Orlando Gomes

Abstract

The Ramsey model is an analytical structure aimed at explaining intertemporal optimal growth. As a consequence, business cycles cannot be generated resorting to this structure, unless one introduces some source of inefficiency. Our central argument is that firms forecast future demand using a simple rule and thus they fail to perceive the full extent in which demand is capable of growing. Hence, firms will not invest as much as it is economically feasible in each moment of time, and this mechanism leads eventually to business cycles. The paper contributes to the endogenous business cycles literature with an important new feature: we do not have to consider the labour market in order to generate fluctuations – the framework just assumes consumption and investment decisions.

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

Volume (Year): 9 (2006)
Issue (Month): 2 (November)
Pages: 13-36
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Handle: RePEc:zag:zirebs:v:9:y:2006:i:2:p:13-36

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

Cited by:
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Orlando Gomes, 2008. "Decentralized Allocation of Human Capital and Nonlinear Growth," Computational Economics, Springer, vol. 31(1), pages 45-75, February. [Downloadable!] (restricted)
Other versions:
- Gomes, Orlando, 2007. "Decentralized allocation of human capital and nonlinear growth," MPRA Paper 2882, University Library of Munich, Germany. [Downloadable!]

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