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Endogenous growth and wave-like business fluctuations

Bambi, M.; Gozzi, F.; Licandro, O.

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Authors

F. Gozzi

O. Licandro



Abstract

This paper argues that observed long lags in innovation implementation rationalize Schumpeter's statement that “wave-like fluctuations in business ... are the form economic development takes in the era of capitalism.” Adding implementation delays to an otherwise standard endogenous growth model with expanding product variety, the equilibrium path admits a Hopf bifurcation where consumption, R&D and output permanently fluctuate. This mechanism is quantitatively consistent with the observed medium-term movements of US aggregate output. In this framework, an optimal allocation may be restored at equilibrium by the mean of a procyclical subsidy, needed to generate additional consumption smoothing. Finally, a procyclical R&D subsidy rate designed to half consumption fluctuations will increase the growth rate from 2.4% to 3.4% with a 9.6% (compensation equivalent) increase in welfare.

Citation

Bambi, M., Gozzi, F., & Licandro, O. (2014). Endogenous growth and wave-like business fluctuations. Journal of Economic Theory, 154, 68-111. https://doi.org/10.1016/j.jet.2014.08.004

Journal Article Type Article
Acceptance Date Jul 2, 2014
Online Publication Date Aug 29, 2014
Publication Date Nov 1, 2014
Deposit Date Aug 2, 2018
Publicly Available Date Sep 24, 2018
Journal Journal of Economic Theory
Print ISSN 0022-0531
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 154
Pages 68-111
DOI https://doi.org/10.1016/j.jet.2014.08.004
Public URL https://durham-repository.worktribe.com/output/1319571

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