Growth CyclesWe 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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agents aggregate analysis arbitrage assume assumptions balanced growth paths Benhabib C₁ calculated characterized complementarity constant consumers contingent decisions denote designs economy Evans and Honkapohja expectational indeterminacy expected interest rate fiat money Figure finite number firms given gopher at nber.harvard.edu growth cycle growth model growth rate high and low high growth http://nber.harvard.edu imperfect competition increasing returns introduce investment learning dynamics linear locally stable low growth machines macroeconomic macroeconomists models with multiple monetary policy monopolist monopolistically competitive multiple equilibria NBER Working Papers no-arbitrage output overlapping generations model Papers and Reprints Pareto optimal partial subscriptions perfect foresight equilibria plausible production possibility frontier r₁ rate of growth rational expectations equilibrium real business cycle realized interest rate returns to scale shocks specification St+1 stable perfect foresight stable under learning steady stock of capital switches technology curve transition probabilities types of capital units of consumption variable Y₁ Z₁ zero profit condition