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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 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. Quantitative analysis reveals the model is at least as capable of accounting for key features of fluctuations at various frequencies as a model with exogenous technology shocks. Moreover, the model can do so without relying as heavily on a highly persistent generating process for such exogenous shocks as standard models must.

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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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  1. David Andolfatto & Glenn M. MacDonald, 1998. "Technology Diffusion and Aggregate Dynamics," Cahiers de recherche CREFE / CREFE Working Papers 58, CREFE, Université du Québec à Montréal.
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Citations

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Cited by:
  1. Gianfranco Giulioni, 2011. "The product innovation process and GDP dynamics," Journal of Evolutionary Economics, Springer, vol. 21(4), pages 595-618, October.
  2. Horii, Ryo, 2012. "Wants and past knowledge: Growth cycles with emerging industries," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 220-238.
  3. Olaf Posch & Klaus Wälde, 2006. "Natural volatility, welfare and taxation," Working Papers 2007_33, Business School - Economics, University of Glasgow.
  4. 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.
  5. Galo Nuño Barrau, 2008. "Schumpeterian Foundations of Real Business Cycles," Working Papers 0805, International Economics Institute, University of Valencia.
  6. 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 2013-03, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
  7. Tobias Kitlinski & Torsten Schmidt, 2011. "The Forecasting Performance of an Estimated Medium Run Model," Ruhr Economic Papers 0301, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  8. Holden, Tom, 2011. "Products, patents and productivity persistence: A DSGE model of endogenous growth," Dynare Working Papers 4, CEPREMAP.
  9. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers 1412, School of Economics, University of Surrey.
  10. 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 2014-01, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.

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