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Endogenous recessions: The creative destruction effect of final product novelty

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  • Giulioni, Gianfranco

Abstract

In this paper we build a basic macroeconomic model aimed to grasp some aspects of the inner functioning of macroeconomic fluctuations. We highlight a mechanism through which the appearance of a product innovation results in an eventual reduction of the aggregate economic activity. When a new product appears, demand moves towards this more attractive product. The 'creative destruction' effect in this context is represented by the resources lost when firms producing old varieties exit the market due to the shortage of demand. Because firms producing a given product receive on average the same amount of demand, exits happen to be highly synchronized. We use this fact to explain the fluctuation asymmetries observed in real data. We test the ability of the model to meet features of real data against the United States' GDP in the 1950-1992 period.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 2 (March)
Pages: 516-522

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:2:p:516-522

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Product differentiation Quality ladder Schumpeterian model Business fluctuations;

References

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  1. Aoki, Masanao & Yoshikawa, Hiroshi, 2002. "Demand saturation-creation and economic growth," Journal of Economic Behavior & Organization, Elsevier, vol. 48(2), pages 127-154, June.
  2. W.A. Razzak, 2001. "Business Cycle Asymmetries: International Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(1), pages 230-243, January.
  3. Galo Nuño Barrau, 2008. "Schumpeterian Foundations of Real Business Cycles," Working Papers 0805, International Economics Institute, University of Valencia.
  4. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier.
  5. George W. Stadler, 1994. "Real Business Cycles," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1750-1783, December.
  6. Sergio Rebelo, 2005. "Real Business Cycle Models: Past, Present, and Future," NBER Working Papers 11401, National Bureau of Economic Research, Inc.
  7. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Staff Report 102, Federal Reserve Bank of Minneapolis.
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