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An Evolutionary Model of Endogenous Business Cycles

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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.

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Authors and Affiliations

  1. Sant'Anna School of Advanced Studies, Laboratory of Economics and Management, Piazza Martiri della Libertà, I-56127, Pisa, Italy

    Giovanni Dosi

  2. Italy and Sant'Anna School of Advanced Studies, University of Verona, Pisa, Italy

    Giorgio Fagiolo

  3. Sant'Anna School of Advanced Studies, Pisa, Italy

    Giorgio Fagiolo & Andrea Roventini

  4. University of Modena and Reggio Emilia, Modena, Reggio Emilia, Italy

    Andrea Roventini

Authors
  1. Giovanni Dosi
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  2. Giorgio Fagiolo
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  3. Andrea Roventini
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Correspondence to Giovanni Dosi.

Additional information

JEL Classifications: C15, C22, C49, E17, E22, E32.

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Dosi, G., Fagiolo, G. & Roventini, A. An Evolutionary Model of Endogenous Business Cycles. Comput Econ 27, 3–34 (2006). https://doi.org/10.1007/s10614-005-9014-2

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