DP5032 Implementation Cycles in the New Economy

Author(s): Pasquale Scaramozzino, Jonathan Temple, Nir Vulkan
Publication Date: May 2005
Keyword(s): implementation cycles, multiple equilibria, New Economy
JEL(s): E32
Programme Areas: International Macroeconomics
Link to this Page: http://www.cepr.org/pubs/dps/DP5032

The economic boom of the USA in the 1990s was remarkable in its duration, the sustained rise in equipment investment, the reduced volatility of productivity growth, and continued uncertainty about the trend growth rate. In this paper we link these phenomena using an extension of the classic model of implementation cycles due to Shleifer (1986). The key idea is that uncertainty about the trend growth rate can lead firms to bring forward the implementation of innovations, temporarily eliminating expectations-driven business cycles, because delay is risky when beliefs are not common knowledge.