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Computational Economics

, Volume 27, Issue 1, pp 3–34 | Cite as

An Evolutionary Model of Endogenous Business Cycles

  • Giovanni DosiEmail author
  • Giorgio Fagiolo
  • Andrea Roventini
Article

Abstract

In this paper, we present an evolutionary model of industry dynamics yielding endogenous 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 anticyclical; 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 

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Copyright information

© Springer Science+Business Media, Inc. 2006

Authors and Affiliations

  • Giovanni Dosi
    • 1
    Email author
  • Giorgio Fagiolo
    • 2
    • 3
  • Andrea Roventini
    • 3
    • 4
  1. 1.Sant'Anna School of Advanced StudiesLaboratory of Economics and ManagementPisaItaly
  2. 2.Italy and Sant'Anna School of Advanced StudiesUniversity of VeronaPisaItaly
  3. 3.Sant'Anna School of Advanced StudiesPisaItaly
  4. 4.University of Modena and Reggio EmiliaModena, Reggio EmiliaItaly

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