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Endogenous Business Cycles in the Ramsey Growth Model

  • Orlando Gomes

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

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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  1. Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, sunspots, and automatic stabilizers," Working Paper Series, Macroeconomic Issues WP-96-16, Federal Reserve Bank of Chicago.
  2. Aloi, Marta & Dixon, Huw D. & Lloyd-Braga, Teresa, 2000. "Endogenous fluctuations in an open economy with increasing returns to scale," Journal of Economic Dynamics and Control, Elsevier, vol. 24(1), pages 97-125, January.
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  9. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Working Paper Series, Macroeconomic Issues 90, Federal Reserve Bank of Chicago.
  10. Giovanni Dosi & Giorgio Fagiolo & Andrea Roventini, 2005. "Animal Spirits, Lumpy Investment, and Endogenous Business Cycles," LEM Papers Series 2005/04, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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