Upswings and downswings of economic activity are caused by forward-looking rational investment choices. When investors can choose between two forms of investments, savings are channelled into the investment form that yields higher returns. Continuing investment into technological imitation decreases returns. At a certain point, investment into technological innovation becomes more profi- table. After an innovation, the economy is on a higher productivity level and investment into technological imitation is again more profitable. This alternating investment behaviour implies short-run cycles in consumption, investment, labour and capital income around a long-run growth path. The model allows to analytically study distributional aspects of business cycles.