The Neoclassical Growth Model with Sinusoidal Investments

Abstract

The aim of the present study is an attempt to extend the neoclassical model of economic growth of Solow by repealing the assumption of fixed investment and introducing an investment function dependent sinusoidally on the time. The adoption of the sinusoidal function of investment is substantiated by the fact that investments (like manufacturing) are largely depended on the economic situation, which is subject to periodic fluctuations. The authors introduce the theoretical considerations on the notion of cyclical and smooth path of temporal capital-labour ratio and labour productivity. When using these tools the authors identified, by calculating the relative deviations of the mentioned path, the impact of investment function dependent sinusoidally on the time.In the empirical analysis the authors conducted the calibration of parameters used by the research model. Based on panel data for the EU15 between the years 2000–2013 the α parameter (production flexibility in relation to capital) was estimated first at 0,349. That value was adopted to further numerical analysis. In the second stage the simulations of numerical, calibrated deviations of temporal cyclical path of capital-labour ratio (labor productivity) from the smooth path of capital-labour ratio (labor productivity) was performed. When conducting numerical analysis the impact of different investment rates (15%, 20%, 25%) and periods of cyclical fluctuations (4 or 10 years) have been considered in relation to the formation of these deviations. Numerical analysis for the economies of the EU15 group was made for one hundred time series.