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Schumpeterian Business Cycles with Pro-Cyclical R&D

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  • Patrick Francois

    (University of British Columbia)

  • Huw Lloyd-Ellis

    (Queen's University)

Abstract

Recent empirical work finds that R&D expenditures are quite procyclical, even for firms that are not credit-constrained during downturns. This has been taken as strong evidence against Schumpeterian-style theories of business cycles that emphasize the idea that downturns in production may be good times to allocate labor towards innovative activities. Here we argue that the procyclicality of R&D investment is, in fact, quite consistent with at least one of these theories. In our analysis, we emphasize three key features of R&D investment relative to other types of innovative activity: (1) it uses implemented knowledge intensively, (2) it is a long-term investment with uncertain applications and (3) it suffers from diminishing returns over time. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 4 (October)
Pages: 567-591

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Handle: RePEc:red:issued:07-53

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Related research

Keywords: Endogenous growth; Endogenous cycles; Research and development; Commercialization;

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References

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  1. Taiji Harashima, 2005. "The Pro-cyclical R&D Puzzle: Technology Shocks and Pro-cyclical R&D Expenditure," Macroeconomics 0507012, EconWPA, revised 12 Jul 2005.
  2. Philippe Aghion & George-Marios Angeletos & Abhijit Banerjee & Kalina Manova, 2005. "Volatility and Growth: Credit Constraints and Productivity-Enhancing Investment," NBER Working Papers 11349, National Bureau of Economic Research, Inc.
  3. Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
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Cited by:
  1. Patrick Francois & Huw Lloyd-Ellis, 2006. "Growth, Cycles and Welfare: A Schumpeterian Perspective," Working Papers 1090, Queen's University, Department of Economics.
  2. Rammer, Christian, 2011. "Auswirkungen der Wirtschaftskrise auf die Innovationstätigkeit der Unternehmen in Deutschland," ZEW Discussion Papers 11-070, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Galo Nuño, 2011. "Optimal research and development and the cost of business cycles," Journal of Economic Growth, Springer, vol. 16(3), pages 257-283, September.
  4. Kadri Männasoo & Jaanika Meriküll, 2011. "How do demand fluctations and credit constraints affect R&D? Evidence from Central, Southern and Eastern Europe," Bank of Estonia Working Papers wp2011-09, Bank of Estonia, revised 19 Jul 2011.
  5. Elena Sochirca & Óscar Afonso & Pedro Mazeda Gil, 2011. "Directed technological change with costly investment and complementarities, and the skill premium," FEP Working Papers 401, Universidade do Porto, Faculdade de Economia do Porto.
  6. Min Ouyang, 2010. "Cyclical Persistence and the Cyclicality of R&D," Working Papers 101104, University of California-Irvine, Department of Economics, revised Mar 2011.

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