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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.

Suggested Citation

  • Orlando Gomes, 2008. "Imperfect Demand Expectations and Endogenous Business Cycles," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 11(1), pages 37-59, May.
    • Handle: RePEc:zag:zirebs:v:11:y:2008:i:1:p:37-59
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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