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Endogenous growth and wave-like business fluctuations

Bambi, Mauro; Gozzi, Fausto; Licandro, Omar

Authors

Mauro Bambi

Fausto Gozzi



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.

Journal Article Type Article
Publication Date Nov 1, 2014
Journal Journal of Economic Theory
Print ISSN 0022-0531
Electronic ISSN 0022-0531
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 154
APA6 Citation Bambi, M., Gozzi, F., & Licandro, O. (2014). Endogenous growth and wave-like business fluctuations. Journal of Economic Theory, 154, https://doi.org/10.1016/j.jet.2014.08.004
DOI https://doi.org/10.1016/j.jet.2014.08.004
Keywords Endogenous growth; Endogenous fluctuations; Innovation cycles; Time delays; Medium-term cycles; Hopf bifurcation
Publisher URL http://dx.doi.org/10.1016/j.jet.2014.08.004
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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