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R&D policy in a volatile economy

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  • Haruyama, Tetsugen

Abstract

The literature on R&D-based growth establishes that market equilibrium is inefficient and derives optimal R&D policy. Normative analyses of this type use the assumption of steady state, largely motivated by analytical convenience. This paper questions this steady-state approach by introducing endogenous cycles as long-run equilibria. We show that the government fails to maximize welfare if policy which is optimal in steady state is myopically applied in cyclical equilibria. More specifically, we demonstrate that (i) cycles arise in the (very) standard R&D-based model of Grossman and Helpman [1991. Innovation and Growth in the Global Economy. MIT Press, Cambridge, MA (Chapter 3)] once the model is framed in discrete time, (ii) these cycles are inefficient in the sense that they prevent welfare maximization, (iii) optimal steady-state R&D policy fails to eliminate cycles, and can even create inefficient cycles, (iv) the application of R&D subsidies leads to a trade-off between growth and macroeconomic stability, and (v) optimal R&D policy in a fluctuating economy is state-dependent, which generalizes optimal steady-state R&D policy.

Suggested Citation

  • Haruyama, Tetsugen, 2009. "R&D policy in a volatile economy," Journal of Economic Dynamics and Control, Elsevier, vol. 33(10), pages 1761-1778, October.
  • Handle: RePEc:eee:dyncon:v:33:y:2009:i:10:p:1761-1778
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    References listed on IDEAS

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    Cited by:

    1. Iwaisako, Tatsuro & Tanaka, Hitoshi, 2017. "Product cycles and growth cycles," Journal of International Economics, Elsevier, vol. 105(C), pages 22-40.
    2. Bei Li & Jie Zhang, 2011. "Subsidies in an Economy with Endogenous Cycles Over Neoclassical Investment and Neo-Schumpeterian Innovation Regimes," Economics Discussion / Working Papers 11-23, The University of Western Australia, Department of Economics.
    3. Kunihiko Konishi, 2015. "A Note on Commodity Taxation and Economic Growth," Economics Bulletin, AccessEcon, vol. 35(1), pages 540-549.
    4. Alexander Steinmetz, 2015. "Competition, innovation, and the effect of R&D knowledge," Journal of Economics, Springer, vol. 115(3), pages 199-230, July.
    5. Kunihiko Konishi, 2015. "Growth Cycles in a Two-country Model of Innovation," Discussion Papers in Economics and Business 15-07, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    6. Alexander Steinmetz, 2008. "Competition, Innovation and the Effect of Knowledge Accumulation," Working Papers 053, Bavarian Graduate Program in Economics (BGPE).
    7. Richard Gretz & Jannett Highfill & Robert Scott, 2012. "R&D subsidy games: a cost sharing approach vs. reward for performance," The Journal of Technology Transfer, Springer, vol. 37(4), pages 385-403, August.
    8. Steinmetz, Alexander, 2010. "Competition, innovation, and the effect of knowledge accumulation," W.E.P. - Würzburg Economic Papers 81, University of Würzburg, Chair for Monetary Policy and International Economics.

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    Keywords

    R&D Cycles Policy;

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