Samuelson's multiplier–accelerator model revisited

Abstract

As demonstrated by Samuelson, the interplay between the multiplier analysis and the principle of acceleration may generate temporary business cycles. We extend Samuelson's seminal framework in the sense that investors now apply a nonlinear mix of extrapolative and regressive expectation formation rules to predict changes in national income. As it turns out, the emergence of booms and slumps may depend on the sentiment of the investors. If they are optimistic (pessimistic), the economy performs well (badly). Moreover, the model produces sustained and intricate fluctuations in economic activity for realistic values of the marginal propensity to consume and the capital to output ratio.