TY  - JOUR
AU  - Evans,George
AU  - Honkapohja,Seppo
AU  - Romer,Paul
TI  - Growth Cycles
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5659
PY  - 1996
Y2  - July 1996
UR  - http://www.nber.org/papers/w5659
L1  - http://www.nber.org/papers/w5659.pdf
N1  - Author contact info:
George Evans
Department of Economics
1285 University of Oregon
Eugene, OR 97403-1285
Tel: 541/346-4662
Fax: 541/346-1243
E-Mail: gevans@uoregon.edu

Seppo Honkapohja
Bank of Finland
Finland
E-Mail: Seppo.Honkapohja@bof.fi

Paul M. Romer
Stern School of Business
New York University
E-Mail: paul@paulromer.net
AB  - 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
ER  -