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Growth, Cycles and Welfare: A Schumpeterian Perspective

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  • Patrick Francois

    ()
    (University of British Columbia)

  • Huw Lloyd-Ellis

    ()
    (Queen's University)

Abstract

We use a Schumpeterian model in which both the economy's growth rate and its volatility are endogenously determined to assess some welfare and policy implications associated with business cycle fluctuations. Because it features a higher average growth rate than its acyclical counterpart, steady-state welfare is higher along the cyclical equilibrium growth path of the model. We assess the impact of alternative stabilization policies designed to smooth cyclical fluctuations. Although, it is possible to significantly reduce the variance of output growth via simple policy measures, the welfare benefits are at best negligible and at worst completely offset by the resulting reduction long-term productivity growth.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1090.pdf
File Function: First version 2006
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1090.

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Length: 26 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:qed:wpaper:1090

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Keywords: Endogenous cycles; Endogenous growth; Welfare; Stabilization policy;

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References

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  1. Francois, P. & Shi, S., 1999. "Innovation, Growth and Welfare-Improving Cycles," Discussion Paper 1999-13, Tilburg University, Center for Economic Research.
  2. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "The Welfare Cost of Business Cycles Revisited: Finite Lives and Cyclical Variation in Idiosyncratic Risk," NBER Working Papers 8040, National Bureau of Economic Research, Inc.
  3. Patrick Francois & Huw Lloyd-Ellis, 2009. "Schumpeterian Business Cycles with Pro-Cyclical R&D," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 567-591, October.
  4. Gadi Barlevy, 2003. "The cost of business cycles under endogenous growth," Working Paper Series WP-03-13, Federal Reserve Bank of Chicago.
  5. Shleifer, Andrei, 1986. "Implementation Cycles," Scholarly Articles 3451303, Harvard University Department of Economics.
  6. Gale, Douglas, 1996. "Delay and Cycles," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 169-98, April.
  7. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March.
  8. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  9. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
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Cited by:
  1. Mauro Boianovsky & Hans-Michael Trautwein, 2008. "Schumpeter on unemployment," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807181726240, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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