Three original models which explain business cycles as a result of self-fulfilling expectations are presented. The models are founded on the structure of dynamic general equilibrium theory. Market power and increasing returns to scale are introduced which allow indeterminancy of the Rational Expectations equilibria to be obtained. Unlike the majority of existing literature on this subject, the departures from perfect markets and constant returns presented in these models are very low and, more importantly, at a realistic level to achieve the respective results. It is demonstrated in all of the presented models that stylized facts of the business cycle can be reproduced.

Optimal growth theory studies the problem of efficient resource allocation over time, a fundamental concern of economic research. Since the 1970s, the techniques of nonlinear dynamical systems have become a vital tool in optimal growth theory, illuminating dynamics and demonstrating the possibility of endogenous economic fluctuations. Kazuo Nishimura's seminal contributions on business cycles, chaotic equilibria and indeterminacy have been central to this development, transforming our understanding of economic growth, cycles, and the relationship between them. The subjects of Kazuo's analysis remain of fundamental importance to modern economic theory. This book collects his major contributions in a single volume. Kazuo Nishimura has been recognized for his contributions to economic theory on many occasions, being elected fellow of the Econometric Society and serving as an editor of several major journals. Chapter “Introduction” is available open access under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License via link.springer.com.

This paper distinguishes two kinds of Endogenous Business Cycle models; EBC1 models, which display dynamic indeterminacy, and EBC2 models, which display steady-state indeterminacy. Both strands of the literature have their origins in the sunspot literature that developed at the University of Pennsylvania in the 1980s. I argue that EBC1 models are part of the evolution of modern macroeconomics that has classical roots dating back to the 1920s. EBC2 models provide a microfoundation to one of the most important ideas to emerge from Keynes' (1936) General Theory; that high involuntary unemployment can persist as part of the steady-state equilibrium of a market economy.

Over the past two decades, the issue of equilibrium indeterminacy has been one of the major research concerns in macroeconomic dynamics. Growth and Business Cycles with Equilibrium Indeterminacy discusses the main topics in this literature. Based on comprehensive surveys and the author’s original research, this book explores sunspot-driven fluctuations in real business cycle models, multiple equilibria in endogenous growth models, and the stabilization effects of fiscal and monetary policy rules. The book also considers equilibrium indeterminacy in open economy models.

This paper estimates a New Keynesian model extended to include heterogeneous expectations, to revisit the evidence that postwar US macroeconomic data can be explained as the outcome of passive monetary policy, indeterminacy, and sunspot-driven fluctuations in the pre-1979 sample, with a switch to active monetary policy and a determinate equilibrium starting in the early 1980s. Different shares of consumers and firms form either rational expectations, or adaptive and extrapolative expectations. The inclusion of heterogeneous expectations alters the determinacy properties of the model compared to the corresponding case under exclusively rational expectations. The Taylor principle is neither necessary nor sufficient, as the details of expectations may matter more for equilibrium stability. The model is estimated with Bayesian techniques, using rolling windows and allowing the parameters to fall both in the determinacy and indeterminacy regions. The estimates reveal large shares of agents who depart from rational expectations; heterogeneous expectations are preferred by the data everywhere in the sample. The results confirm that macroeconomic data in the early windows are better explained by indeterminacy, while determinacy is favored over the latest two decades. We uncover, however, some subsamples that include the 1980s and 1990s in which the Taylor principle is satisfied, but expectations becoming extrapolative raise the probability of indeterminacy to 50% and more.