The authors construct a rational expectations model in which the economy switches stochastically between periods of low and high growth. When agents expect growth to be slow, the returns on investment are low and little investment takes place. But if agents expect fast growth, investment is high, returns are high, and growth is rapid. This expectational indeterminacy is induced by monopolistic competition and complementarity between different types of capital goods. Neither externalities nor increasing returns to scale are required. The equilibrium with growth cycles is stable under the dynamics implied by a simple learning rule. Copyright 1998 by American Economic Association.
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Volume (Year): 88 (1998)
Issue (Month): 3 (June)
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