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Is Schumpeterian `creative destruction' a plausible source of endogenous real business cycle shocks?

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  • Phillips, Kerk L.
  • Wrase, Jeff

Abstract

This paper looks at the linkages between growth and business cycles by bringing together two strands of literature. We incorporate a quality ladders engine of growth into an otherwise standard real business cycle model. Our fundamental question is, can Schumpeter’s creative destruction process which leads to lumpy technological improvement over time also generate realistic business cycles? We use a standard real business cycle approach to solve for rules of motion in our state variables and proceed to generate artificial time series. We compare the statistical properties of these series with their historical counterparts to determine if the model mimics the real world closely. One advantage our approach has over the standard approach is that the trend component is included in our artificial series just as it is in the data. Hence, we are not tied to any particular filtering method when we compare simulations with the real world data. We find that Schumpeterian fluctuations alone cannot generate realistic business cycles. We also find, however, that a model with both Schumpeterian and standard RBC shocks performs better in many dimensions than a model relying on standard RBC shocks alon

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 30 (2006)
Issue (Month): 11 (November)
Pages: 1885-1913

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Handle: RePEc:eee:dyncon:v:30:y:2006:i:11:p:1885-1913

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Citations

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Cited by:
  1. Olaf, POSCH & Klaus, WAELDE, 2005. "Natural volatility, welfare and taxation," Discussion Papers (ECON - Département des Sciences Economiques), Université catholique de Louvain, Département des Sciences Economiques 2005009, Université catholique de Louvain, Département des Sciences Economiques.
  2. Helmut Hofer & Torsten Schmidt & Klaus Weyerstrass, 2010. "Practice and prospects of medium-term economic forecasting," NRN working papers 2010-12, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
  3. Tobias Kitlinski & Torsten Schmidt, 2011. "The Forecasting Performance of an Estimated Medium Run Model," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0301, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  4. Tom Holden, 2010. "Products, patents and productivity persistence: A DSGE model of endogenous growth," Economics Series Working Papers 512, University of Oxford, Department of Economics.
  5. Horii, Ryo, 2012. "Wants and past knowledge: Growth cycles with emerging industries," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(2), pages 220-238.
  6. Gianfranco Giulioni, 2011. "The product innovation process and GDP dynamics," Journal of Evolutionary Economics, Springer, vol. 21(4), pages 595-618, October.
  7. Chase Coleman & Kerk L. Phillips, 2014. "Business Cycle Persistence in a Model with Schumpeterian Growth and Uncorrelated Shocks," BYU Macroeconomics and Computational Laboratory Working Paper Series, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory 2014-01, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
  8. Galo Nuño Barrau, 2008. "Schumpeterian Foundations of Real Business Cycles," Working Papers, International Economics Institute, University of Valencia 0805, International Economics Institute, University of Valencia.
  9. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers, School of Economics, University of Surrey 1412, School of Economics, University of Surrey.
  10. Chase Coleman & Kerk Phillips, 2013. "Can Uncorrelated Shocks Generate Aggregate Autocorrelation?: Business Cycle Persistence in a Model with Endogenous Growth and Fluctuations," BYU Macroeconomics and Computational Laboratory Working Paper Series, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory 2013-03, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.

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