Date Added: Nov 2009
The authors consider a one-sector Ramsey-type growth model with inelastic labor and learning-by-doing externalities based on cumulative gross investment (cumulative production of capital goods), which is assumed, in accordance with Arrow , to be a good index of experience. They prove that a slight memory effect characterizing the learning-by-doing process is enough to generate business cycle fluctuations through a Hopf bifurcation. This is obtained for reasonable parameter values, notably for both the elasticity of output with respect to the externality and the elasticity of inter temporal substitution. Hence, contrary to all the results available in the literature on aggregate models, they show that endogenous fluctuations are compatible with a low (in actual fact, zero) wage elasticity of the labor supply.