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From growth to cycles through beliefs

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  • Christopher M. Gunn

Abstract

I present a theoretical model where the economy endogenously adopts the technological ideas of a slowly evolving technological frontier, and show that the presence of a "technological gap" between unadopted ideas and current productivity can lead to multiple equilibria and therefore the possibility that changes in beliefs can be self-fulfilling, often referred to as sunspots. In the model these sunspots take the form of beliefs about the value of adopting the new technological ideas, and unleash both a boom in aggregate quantities as well as eventual productivity growth, increasing the value of adoption and self-confirming the beliefs. Moreover, I demonstrate that the scope for these indeterminacies is a function of the steady-state growth rate of the underlying technological frontier of ideas, and that during times of low growth in ideas, the potential for indeterminacies disappears. Under this view, technology becomes important for cycles not necessarily because of sudden shifts in the technological frontier, but rather, because it defines a technological regime for the economy such that expectations about its value can produce aggregate fluctuations where in a different regime they could not.

Suggested Citation

  • Christopher M. Gunn, 2011. "From growth to cycles through beliefs," Department of Economics Working Papers 2011-04, McMaster University.
  • Handle: RePEc:mcm:deptwp:2011-04
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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2011-04.pdf
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    Keywords

    expectations-driven business cycle; sunspot; multiple equilibria; indeterminacy; technology; news shock; intangible capital; investment-specific technical change; embodied; technological transition; technological adoption.;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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