7 An Evolutionary Model of Endogenous Business Cycles∗

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 produce heterogeneous machine tools. Firms in the sec-ond industry invest in new machines and produce a homogenous consumption good. Consumers sell their labor and fully consume their income. In line with the em-pirical literature on investment patterns, we assume that the investment decisions by firms are lumpy and constrained by their financial structures. Moreover, draw-ing 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 chang