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An R&D-based real business cycle model

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  • Ka Wai Terence Fung

    (United International College)

  • Chi Keung Marco Lau

    (Northumbria University)

  • Kwok Ho Chan

    (United International College)

Abstract

The New Keynesian Real Business Cycle model with staggered price adjustment is augmented with an R&D producing sector. Two sources of economic shocks are considered, namely random participation (perturbances to the value of alternative investment opportunities in another sector) and financial intermediation (shocks to the cost of raising capital in the financial intermediation market). We find that, when compared to the baseline model, both models can explain procyclical R&D spending. Additionally, the investment oversensitivity problem is corrected. However, only the financial intermediation model is consistent with the observed finding that the volatility of R&D is larger than those of investment and output.

Suggested Citation

  • Ka Wai Terence Fung & Chi Keung Marco Lau & Kwok Ho Chan, 2016. "An R&D-based real business cycle model," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 63(4), pages 327-358, December.
    • Handle: RePEc:spr:inrvec:v:63:y:2016:i:4:d:10.1007_s12232-016-0257-0
    DOI: 10.1007/s12232-016-0257-0
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    Cited by:

    1. Fung, Ka Wai Terence & Lau, Chi Keung Marco, 2013. "Financial Development, Econmic Growth and R&D Cyclical Movement," MPRA Paper 52567, University Library of Munich, Germany.

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    More about this item

    Keywords

    Endogenous growth model; Real business cycle; Asymmetric information; Research and development;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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