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Growth Cycles

We construct a rational expectations model in which aggregate growth alternates between a low growth and a high growth state. When all agents expect growth to be slow, the returns on investment are low, and little investment takes place. This slows growth and confirms the prediction that the returns on investment will be low. But if agents expect fast growth, investment is high, returns are high, and growth is rapid. This expectational indeterminacy is induced by complementarity between different types of capital goods. In a growth cycle there are stochastic shifts between high and low growth states and agents take full account of these transitions. The rules that agents need to form rational expectations in this equilibrium are simple. The equilibrium with growth cycles is stable under the dynamics implied by a correspondingly simple learning rule

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5659.

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Date of creation: Jul 1996
Date of revision:
Publication status: published as American Economic Review, Vol. 88, no. 3 (June 1998): 495-515.
Handle: RePEc:nbr:nberwo:5659
Note: EFG
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Benhabib, Jess & Gali, Jordi, 1995. "On Growth and Indeterminacy: Some Theory and Evidence," Working Papers 95-08, C.V. Starr Center for Applied Economics, New York University.
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  10. Christophe Chamley, 1991. "Externalities and Dynamics in Models of "Learning or Doing"," Boston University - Institute for Economic Development 17, Boston University, Institute for Economic Development.
  11. Benhabib Jess & Perli Roberto, 1994. "Uniqueness and Indeterminacy: On the Dynamics of Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 63(1), pages 113-142, June.
  12. Evans, George W & Honkapohja, Seppo, 1995. "Local Convergence of Recursive Learning to Steady States and Cycles in Stochastic Nonlinear Models," Econometrica, Econometric Society, vol. 63(1), pages 195-206, January.
  13. Laurence Ball & N. Gregory Mankiw, 1994. "A Sticky-Price Manifesto," NBER Working Papers 4677, National Bureau of Economic Research, Inc.
  14. Bryant, John, 1983. "A Simple Rational Expectations Keynes-Type Model," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 525-28, August.
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  16. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
  17. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  18. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
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