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The Effect of Business Cycles on Growth: Keynes vs. Schumpeter

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  • Dehejia, Vivek H
  • Rowe, Nicholas

Abstract

In contrast to recent 'neo-Schumpeterian' models, which argue that business cycles are good for growth, the authors develop a 'neo-Keynesian' model, where monopolistically competitive firms set prices and produce output in advance of the realization of (stochastic) monetary velocity. In such a setting, there is an asymmetry in the effect of business cycles on income: recessions are bad, because the representative firm is demand-constrained and its unsold output is wasted, but booms are not good, because the firm is output-constrained and cannot produce any more output. A more severe business cycle thus reduces the expected income of a firm. and the expected return to investment, which reduces the growth rate of the economy. Copyright 1998 by Oxford University Press.

Suggested Citation

  • Dehejia, Vivek H & Rowe, Nicholas, 1998. "The Effect of Business Cycles on Growth: Keynes vs. Schumpeter," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 501-511, July.
  • Handle: RePEc:oup:ecinqu:v:36:y:1998:i:3:p:501-11
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