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Volatility in the knowledge economy

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Author Info
Graciela Chichilnisky ()
Olga Gorbachev ()

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Abstract

We seek to explain the economic volatility of the last 6 years, in particular the rapid expansion and contraction of the knowledge sectors. Our hypothesis is that these sectors amplify the business cycle due to their increasing returns to scale, growing faster than others in an upswing and contracting faster in a downswing. To test this hypothesis we postulate a general equilibrium model with two sectors: one with increasing returns that are external to the firm and endogenously determined - the knowledge sector - and the other with constant returns to scale. We introduce a new measure of volatility of output, a ‘real beta’, and derive a ‘resolving’ equation, from which we prove that the increasing return sectors exhibit more volatility then other sectors. We validate the main results on US macro economic data of real GDP by industry (2-3 digits SIC codes) of the 1977-2001 period, and provide policy conclusions. Copyright Springer-Verlag Berlin/Heidelberg 2004

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File URL: http://hdl.handle.net/10.1007/s00199-004-0491-7
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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 24 (2004)
Issue (Month): 3 (October)
Pages: 531-547
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Handle: RePEc:spr:joecth:v:24:y:2004:i:3:p:531-547

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Related research
Keywords: Volatility; Macroeconomics; Applied microeconomics; General equilibrium; Knowledge economy; Knowledge Revolution; Increasing returns to scale; External economies of scale; Business cycles.;

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References listed on IDEAS
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  16. Stephanie Schmitt-Grohe, 2000. "Endogenous Business Cycles and the Dynamics of Output, Hours, and Consumption," American Economic Review, American Economic Association, vol. 90(5), pages 1136-1159, December. [Downloadable!] (restricted)
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  17. Chipman, John S, 1970. "External Economies of Scale and Competitive Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 347-85, August. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Olga gorbachev, 2007. "Did Household Consumption Become More Volatile?," ESE Discussion Papers 161, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
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