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Is Schumpeterian "Creative Destruction" a Plausible Source of Endogenous Real Business Cycle Shocks?

Author

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  • Kerk L. Phillips

    (Brigham Young University)

  • Jeff Wrase

    (U.S. Senate Joint Economic Committee)

Abstract

This paper looks at the linkages between growth and business cycles by bringing together two strands of literature. We incorporate a quality ladders engine of growth into an otherwise standard real business cycle model. Our fundamental question is, can Schumpeter’s creative destruction process which leads to technological improvement over time also generate realistic business cycles? We use a standard real business cycle approach to solve for rules of motion in our state variables and proceed to generate artificial time series. We compare the statistical properties of these series with their historical counterparts to determine if the model mimics the real world closely. One advantage our approach has over the standard approach is that the trend component is included in our artificial series just as it is in the data. Hence, we are not tied to any particular filtering method when we compare simulations with the real world data. Quantitative analysis reveals the model is at least as capable of accounting for key features of fluctuations at various frequencies as a model with exogenous technology shocks. Moreover, the model can do so without relying as heavily on a highly persistent generating process for such exogenous shocks as standard models must.

Suggested Citation

  • Kerk L. Phillips & Jeff Wrase, 2003. "Is Schumpeterian "Creative Destruction" a Plausible Source of Endogenous Real Business Cycle Shocks?," GE, Growth, Math methods 0304001, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpge:0304001
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    Cited by:

    1. Horii, Ryo, 2012. "Wants and past knowledge: Growth cycles with emerging industries," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 220-238.
    2. Kitlinski, Tobias & Schmidt, Torsten, 2011. "The Forecasting Performance of an Estimated Medium Run Model," Ruhr Economic Papers 301, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Hofer Helmut & Weyerstraß Klaus & Schmidt Torsten, 2011. "Practice and Prospects of Medium-term Economic Forecasting," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 231(1), pages 153-171, February.
    4. Kushal K. Reddy & Vipin P. Veetil, 2023. "Business cycles and the internal dynamics of firms," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 36(1), pages 43-60, March.
    5. Olaf, POSCH & Klaus, WAELDE, 2005. "Natural volatility, welfare and taxation," Discussion Papers (ECON - Département des Sciences Economiques) 2005009, Université catholique de Louvain, Département des Sciences Economiques.
    6. Tobias Kitlinski & Torsten Schmidt, 2011. "The Forecasting Performance of an Estimated Medium Run Model," Ruhr Economic Papers 0301, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    7. Tom Holden, 2010. "Products, patents and productivity persistence: A DSGE model of endogenous growth," Economics Series Working Papers 512, University of Oxford, Department of Economics.
    8. repec:zbw:rwirep:0301 is not listed on IDEAS
    9. Chase Coleman & Kerk L. Phillips, 2014. "Business Cycle Persistence in a Model with Schumpeterian Growth and Uncorrelated Shocks," BYU Macroeconomics and Computational Laboratory Working Paper Series 2014-01, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.
    10. Frijters, Paul & Antić, Nemanja, 2016. "Can collapsing business networks explain economic downturns?," Economic Modelling, Elsevier, vol. 54(C), pages 289-308.
    11. Gianfranco Giulioni, 2011. "The product innovation process and GDP dynamics," Journal of Evolutionary Economics, Springer, vol. 21(4), pages 595-618, October.
    12. Galo Nuño Barrau, 2008. "Schumpeterian Foundations of Real Business Cycles," Working Papers 0805, International Economics Institute, University of Valencia.
    13. Marcin Bielecki, 2017. "Business cycles, innovation and growth: welfare analysis," Working Papers 2017-19, Faculty of Economic Sciences, University of Warsaw.
    14. Giulioni, Gianfranco, 2010. "Endogenous recessions: The creative destruction effect of final product novelty," Economic Modelling, Elsevier, vol. 27(2), pages 516-522, March.
    15. Filip Rozsypal, 2015. "Schumpeterian business cycles," 2015 Meeting Papers 320, Society for Economic Dynamics.
    16. Tom Holden, 2012. "Medium-frequency cycles and the remarkable near trend-stationarity of output," School of Economics Discussion Papers 1412, School of Economics, University of Surrey.
    17. Chase Coleman & Kerk Phillips, 2013. "Can Uncorrelated Shocks Generate Aggregate Autocorrelation?: Business Cycle Persistence in a Model with Endogenous Growth and Fluctuations," BYU Macroeconomics and Computational Laboratory Working Paper Series 2013-03, Brigham Young University, Department of Economics, BYU Macroeconomics and Computational Laboratory.

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    More about this item

    Keywords

    Schumpeter; growth; cycles; real business cycles;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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