ABSTRACT
Investment belongs to key factors of long-term economic growth and is highly sensitive to business cycles. In the original Solow model, investments represent a constant fraction of output. This chapter questions that assumption and introduces fluctuations on the investment side, with an investment rate changing along a sine wave in time. The sine function is adopted to describe changes in the investment rate because investment depends to a great extent on business cycles that are characterized by periodic fluctuations. The chapter describes assumptions of the model, including that about the investment rate. It proposes a solution of the model based on cyclical growth paths of capital per worker and labour productivity. The chapter proposes calibrations of growth paths of labour productivity and summarizes numerical simulations of those paths for various cycle lengths of fluctuations in investment rates and various levels of average investment rate.
