Animal Spirits, Lumpy Investment, and Endogenous Business Cycles

Giovanni Dosi, Giorgio Fagiolo () and Andrea Roventini

LEM Papers Series from Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy

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.

Keywords: Evolutionary Dynamics; Agent-Based Computational Economics; Animal Spirits; Lumpy Investment; Output Fluctuations; Endogenous Business Cycles. (search for similar items in EconPapers)
Date: 2005-04-10
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-cmp, nep-evo, nep-mac, nep-pke and nep-tid
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Citations: View citations in EconPapers (8)

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