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Endogenous growth and wave-like business fluctuations

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  • Bambi, Mauro
  • Gozzi, Fausto
  • Licandro, Omar

Abstract

This paper argues that observed long lags in innovation implementation rationalize Schumpeter's statement that “wave-like fluctuations in business ... are the form economic development takes in the era of capitalism.” Adding implementation delays to an otherwise standard endogenous growth model with expanding product variety, the equilibrium path admits a Hopf bifurcation where consumption, R&D and output permanently fluctuate. This mechanism is quantitatively consistent with the observed medium-term movements of US aggregate output. In this framework, an optimal allocation may be restored at equilibrium by the mean of a procyclical subsidy, needed to generate additional consumption smoothing. Finally, a procyclical R&D subsidy rate designed to half consumption fluctuations will increase the growth rate from 2.4% to 3.4% with a 9.6% (compensation equivalent) increase in welfare.

Suggested Citation

  • Bambi, Mauro & Gozzi, Fausto & Licandro, Omar, 2014. "Endogenous growth and wave-like business fluctuations," Journal of Economic Theory, Elsevier, vol. 154(C), pages 68-111.
  • Handle: RePEc:eee:jetheo:v:154:y:2014:i:c:p:68-111
    DOI: 10.1016/j.jet.2014.08.004
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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. repec:spr:joecth:v:65:y:2018:i:2:d:10.1007_s00199-016-1017-9 is not listed on IDEAS
    3. Mauro Bambi & Cristina Girolami & Salvatore Federico & Fausto Gozzi, 2017. "Generically distributed investments on flexible projects and endogenous growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(2), pages 521-558, February.
    4. BOUCEKKINE, Raouf & FABBRI, Giorgio & PINTUS, Patrick, 2012. "On the optimal control of a linear neutral differential equation arising in economics," CORE Discussion Papers RP 2449, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Raouf Boucekkine & Giorgio Fabbri & Patrick-Antoine Pintus, 2011. "On the optimal control of a linear neutral differential equation arising in economics," Working Papers halshs-00576770, HAL.
    6. Simone Marsiglio & Marco Tolotti, 2018. "Endogenous growth and technological progress with innovation driven by social interactions," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 65(2), pages 293-328, March.
    7. repec:kap:compec:v:51:y:2018:i:1:d:10.1007_s10614-016-9597-9 is not listed on IDEAS
    8. repec:kap:compec:v:51:y:2018:i:3:d:10.1007_s10614-016-9633-9 is not listed on IDEAS
    9. d’Albis, Hippolyte & Augeraud-Véron, Emmanuelle & Hupkes, Hermen Jan, 2014. "Multiple solutions in systems of functional differential equations," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 50-56.
    10. Lin, Hwan C. & Shampine, L.F., 2014. "Finite-length Patents and Functional Differential Equations in a Non-scale R&D-based Growth Model," MPRA Paper 61603, University Library of Munich, Germany.
    11. Nikolay Chernyshev, 2017. "R&D Cyclicality and Composition Effects: A Unifying Approach," CDMA Working Paper Series 201705, Centre for Dynamic Macroeconomic Analysis.

    More about this item

    Keywords

    Endogenous growth; Endogenous fluctuations; Innovation cycles; Time delays; Medium-term cycles; Hopf bifurcation;

    JEL classification:

    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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