Is Schumpeterian `creative destruction' a plausible source of endogenous real business cycle shocks?
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 Schumpeterâ€™s creative destruction process which leads to lumpy 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. We find that Schumpeterian fluctuations alone cannot generate realistic business cycles. We also find, however, that a model with both Schumpeterian and standard RBC shocks performs better in many dimensions than a model relying on standard RBC shocks alon
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