2005/04 | LEM Working Paper Series | |
Animal Spirits, Lumpy Investment, and Endogenous Business Cycles |
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Giovanni Dosi, Giorgio Fagiolo, Andrea Roventini |
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Keywords | ||
Evolutionary Dynamics, Agent-Based Computational Economics, Animal Spirits,
Lumpy Investment, Output Fluctuations, Endogenous Business Cycles.
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JEL Classifications | ||
C15, C22, C49, E17, E22, E32.
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Abstract | ||
In this paper, we present an evolutionary model of industry dynamics yielding en-
dogenous business cycles with 'Keynesian' features. The model describes an economy
composed of firms and consumers/workers. Firms belong to two industries. The first
one performs R&D and produces heterogeneous machine tools. Firms in the second industry
invest in new machines and produce a homogenous consumption good.
Consumers sell their labor and fully consume their income. In line with the empirical
literature on investment patterns, we assume that the investment decisions
by firms are lumpy and constrained by their financial structures. Moreover, drawing
from behavioral theories of the firm, we assume boundedly rational expectation
formation. Simulation results show that the model is able to deliver self-sustaining
patterns of growth characterized by the presence of endogenous business cycles. The
model can also replicate the most important stylized facts concerning micro- and
macro-economic dynamics. Indeed, we find that investment is more volatile than
GDP; consumption is less volatile than GDP; investment, consumption and change
in stocks are procyclical and coincident variables; employment is procyclical;
unemployment rate is countercyclical; firm size distributions are skewed but depart from
log-normality; firm growth distributions are tent-shaped.
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