Business cycle dynamics

Abstract

This paper attempts to simulate endogenous cyclical behaviour through variations on the standard real business models. This paper relaxes the perfect foresight assumption implied by the rational agent hypothesis. It is replaced by imperfect adaptive expectations. The model is extended with a delay between investment and capital accumulation. This paper also simulates a non-equilibrium timedifferential wage adjustment in a model economy. The models show that the boom produced by a single positive technology shock can be followed by the equivalent of a recession. The models are solved using numerical methods for differential equations, which allow for non-linear dynamics, as opposed to the usual log linearisation.