Animal spirits, technology shocks and the business cycle

This paper presents a two-sector growth model which allows indeterminacy to occur at relatively mild degrees of increasing returns. It is shown that economies of scale need only be present in one sector of the economy, e.g. the investment good producing sector. This new feature of the model builds on evidence that was recently reported by Basu and Fernald (1997), (Journal of Political Economy 105, 249-283) and others. The time series that are generated by the model have properties that are comparable to the real U.S. postwar data. The sunspot driven model is also able to solve some puzzles of business cycle research which standard Real Business Cycle models have not been able to explain. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification. E00; E32.