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Growth Cycles

Author

Listed:
  • Paul Romer
  • George Evans
  • Seppo Hokapohja

Abstract

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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  • Paul Romer & George Evans & Seppo Hokapohja, "undated". "Growth Cycles," Home Pages _001, Stanford University.
    • Handle: RePEc:wop:stanhp:_001
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    File URL: http://www-leland.stanford.edu/~promer/gro_cyc.pdf
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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