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Volatility in the knowledge economy

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Author Info
Graciela Chichilnisky () (Columbia University - Program on Information and Resources)
Olga Gorbachev () (Columbia University - Department of Economics)

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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.

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Publisher Info
Paper provided by Columbia University, Department of Economics in its series Discussion Papers with number 0304-13.

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Length: 22 pages
Date of creation: 2004
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Handle: RePEc:clu:wpaper:0304-13

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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. Chichilnisky, Graciela, 1993. "Traditional comparative advantages vs. economies of scale: NAFTA and GATT," MPRA Paper 8359, University Library of Munich, Germany. [Downloadable!]
  2. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October. [Downloadable!] (restricted)
  3. Catherine J. Morrison Paul & Donald S. Siegel, 1999. "Scale Economies and Industry Agglomeration Externalities: A Dynamic Cost Function Approach," American Economic Review, American Economic Association, vol. 89(1), pages 272-290, March. [Downloadable!] (restricted)
  4. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December. [Downloadable!] (restricted)
  5. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
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  6. Cass, D. & Polemarchakis, H., 1990. "Convexity and sunspots: a remark," CORE Discussion Papers 1990017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    Other versions:
  7. 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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  8. Dale W. Jorgenson & Mun S. Ho & Kevin J. Stiroh, 2002. "Projecting productivity growth: lessons from the U.S. growth resurgence," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 1-13. [Downloadable!]
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  9. 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)
  10. Chichilnisky, Graciela, 1996. "Trade regimes and GATT: resource-intensive vs. knowledge intensive growth," MPRA Paper 8493, University Library of Munich, Germany. [Downloadable!]
  11. Jorgenson, Dale W, 1988. "Productivity and Postwar U.S. Economic Growth," Journal of Economic Perspectives, American Economic Association, vol. 2(4), pages 23-41, Fall. [Downloadable!] (restricted)
  12. Burnside, Craig, 1996. "Production function regressions, returns to scale, and externalities," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 177-201, April. [Downloadable!] (restricted)
  13. Chichilnisky, Graciela, 1994. "Traditional comparative advantage vs. increasing returns to scale: NAFTA and the GATT," MPRA Paper 8360, University Library of Munich, Germany. [Downloadable!]
  14. Brezis, Elise S & Krugman, Paul R & Tsiddon, Daniel, 1993. "Leapfrogging in International Competition: A Theory of Cycles in National Technological Leadership," American Economic Review, American Economic Association, vol. 83(5), pages 1211-19, December. [Downloadable!] (restricted)
  15. Heal, Geoffrey, 1986. "Macrodynamics and Returns to Scale," Economic Journal, Royal Economic Society, vol. 96(381), pages 191-98, March. [Downloadable!] (restricted)
  16. Heal, G.M., 1997. "The Economics of Increasing Returns," Papers 97-20, Columbia - Graduate School of Business.
  17. Panagariya, Arvind, 1981. "Variable Returns to Scale in Production and Patterns of Specialization," American Economic Review, American Economic Association, vol. 71(1), pages 221-30, March. [Downloadable!] (restricted)
  18. Krugman, Paul R, 1981. "Intraindustry Specialization and the Gains from Trade," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 959-73, October. [Downloadable!] (restricted)
  19. Chichilnisky, Graciela & Beltratti, Andrea & Heal, Geoffrey, 1998. "Sustainable use of renewable resources, Chapter 2.1," MPRA Paper 8815, University Library of Munich, Germany. [Downloadable!]
  20. Werner Antweiler & Daniel Trefler, 2000. "Increasing Returns and All That: A View From Trade," NBER Working Papers 7941, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Susanto Basu & John G. Fernald, 1995. "Aggregate Productivity and the Productivity of Aggregates," NBER Working Papers 5382, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June. [Downloadable!] (restricted)
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  23. Rivera-Batiz, Luis A & Romer, Paul M, 1991. "Economic Integration and Endogenous Growth," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 531-55, May. [Downloadable!] (restricted)
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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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