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Innovation and Finance: An SFC Analysis of Great Surges of Development

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  • Alessandro Caiani
  • Antoine Godin
  • Stefano Lucarelli

Abstract

Schumpeter, a century ago, argued that boom-and-bust cycles are intrinsically related to the functioning of a capitalistic economy. These cycles, inherent to the rise of innovation, are an unavoidable consequence of the way in which markets evolve and assimilate successive technological revolutions. Furthermore, Schumpeter's analysis stressed the fundamental role played by finance in fostering innovation, in defining bank credit as the "monetary complement" of innovation. Nevertheless, we feel that the connection between innovation and firm financing has seldom been examined from a theoretical standpoint, not only by economists in general, but even within the Neo-Schumpeterian research line. Our paper aims at analyzing both the long-term structural change process triggered by innovation and the related financial dynamics inside the coherent framework provided by the stock-flow consistent (SFC) approach. The model presents a multisectoral economy composed of consumption and capital goods industries, a banking sector, and two household sectors: capitalists and wage earners. The SFC approach helps us to track the flows of funds resulting from the rise of innovators in the system. The dynamics of prices, employment, and wealth distribution among the different sectors and social groups is analyzed. Above all, the essential role of finance in fostering innovation and its interaction with the real economy is underlined.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_733.

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Date of creation: Oct 2012
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Handle: RePEc:lev:wrkpap:wp_733

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Keywords: Schumpeter; Innovation; Stock-flow Consistent Models; Monetary Circuit;

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  1. Gennaro Zezza, 2004. "Some Simple, Consistent Models of the Monetary Circuit," Macroeconomics, EconWPA 0405006, EconWPA.
  2. Mariana Mazzucato, 2003. "Risk, Variety and Volatility in the Early Auto and PC Industry," Open Discussion Papers in Economics, The Open University, Faculty of Social Sciences, Department of Economics 41, The Open University, Faculty of Social Sciences, Department of Economics.
  3. Giulio Bottazzi & Angelo Secchi & Federico Tamagni, 2008. "Productivity, profitability and financial performance," Industrial and Corporate Change, Oxford University Press, vol. 17(4), pages 711-751, August.
  4. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, American Finance Association, vol. 64(1), pages 151-185, 02.
  5. Seppecher, Pascal, 2012. "Flexibility Of Wages And Macroeconomic Instability In An Agent-Based Computational Model With Endogenous Money," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 16(S2), pages 284-297, September.
  6. Domenico Gatti & Edoardo Gaffeo & Mauro Gallegati, 2010. "Complex agent-based macroeconomics: a manifesto for a new paradigm," Journal of Economic Interaction and Coordination, Springer, Springer, vol. 5(2), pages 111-135, December.
  7. Castellacci, Fulvio, 2008. "Innovation and the competitiveness of industries: comparing the mainstream and the evolutionary approaches," MPRA Paper 27523, University Library of Munich, Germany.
  8. Andrea Mina & Henry Lahr & Alan Hughes, 2013. "The demand and supply of external finance for innovative firms," Industrial and Corporate Change, Oxford University Press, vol. 22(4), pages 869-901, August.
  9. Stephen Kinsella & Matthias Greiff & Edward J Nell, 2011. "Income Distribution in a Stock-Flow Consistent Model with Education and Technological Change," Eastern Economic Journal, Palgrave Macmillan, vol. 37(1), pages 134-149.
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Cited by:
  1. Greg Hannsgen, 2013. "Heterodox Shocks," Economics Working Paper Archive, Levy Economics Institute wp_766, Levy Economics Institute.

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