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A Model of Primary and Secondary Waves in Investment Cycles

  • Guido Fioretti

    (University of Rome "La Sapienza" and University of Stuttgart)

Schumpeter maintained that oscillations of macroeconomic variables are only the "secondary wave" of business cycles, a reflex of more fundamental "primary waves" at the microeconomic level caused by the innovative activity of entrepreneurs. Uniting Schumpeter's concern for innovation with Keynes' concern for uncertainty and expectations formation, this article focuses on the behaviour of entrepreneurs confronting uncertainty caused by innovation. Entrepreneurs' behaviour is reconstructed by modelling the functioning of their cognitive processes when innovations appear. Recognition of the possibilities opened up by a successful innovation generates a state of optimism in the minds of single entrepreneurs, which eventually propagates to the whole economy triggering an investments upswing. likewise, unsuccessful innovations can trigger a downswing.

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File URL: http://econwpa.repec.org/eps/mic/papers/0207/0207014.pdf
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Paper provided by EconWPA in its series Microeconomics with number 0207014.

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Length: 34 pages
Date of creation: 18 Aug 2002
Date of revision:
Handle: RePEc:wpa:wuwpmi:0207014
Note: Type of Document - PDF; pages: 34; figures: included. Author's home page is at
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