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Endogenous Growth and Wave-Like Business Fluctuation

  • Mauro Bambi
  • Omar Licandro

version: September 2011 This paper is intended to answer why and how innovation activities promoting economic growth may indeed induce economic fluctuations. To this purpose, it adds an adoption lag to an otherwise standard endogenous growth model with expanding product variety. It shows that the equilibrium path admits a Hopf bifurcation where consumption, R&D and output permanently fluctuate. When adjusting to environmental changes would require some concentration of innovation activities, the associated mass of new businesses will become eventually operative at some point in the future injecting additional resources to the economy. Consumption smoothing will create a new wave of innovations, repeating it again and again as time passes. A simple quantitative exercise shows that such an endogenous mechanism relating the sources of growth and business fluctuations is not only theoretically possible but quantitatively relevant. Finally, the paper quantitatively finds that a procyclical 10% subsidy rate halving consumption fluctuations will increase the growth rate from 2.4% to 3.4% with a 9.6% increase in welfare, from which 6.3% comes from consumption smoothing.

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File URL: http://research.barcelonagse.eu/tmp/working_papers/533.pdf
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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 533.

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Date of creation: Mar 2011
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Handle: RePEc:bge:wpaper:533
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  1. Raouf Boucekkine & Patrick-Antoine Pintus, 2010. "Is History a Blessing or a Curse? International Borrowing without Commitment, Leapfrogging and Growth Reversals," Working Papers halshs-00535592, HAL.
  2. Diego A. Comin & Mark Gertler & Ana Maria Santacreu, 2009. "Technology Innovation and Diffusion as Sources of Output and Asset Price Fluctuations," NBER Working Papers 15029, National Bureau of Economic Research, Inc.
  3. Boucekkine, Raouf & del Rio, Fernando & Licandro, Omar, 1999. "Endogenous vs Exogenously Driven Fluctuations in Vintage Capital Models," Journal of Economic Theory, Elsevier, vol. 88(1), pages 161-187, September.
  4. Gadi Barlevy, 2003. "The cost of business cycles under endogenous growth," Working Paper Series WP-03-13, Federal Reserve Bank of Chicago.
  5. Collard, Fabrice & Licandro, Omar & Puch, Luis, 2005. "The Short-Run Dynamics of Optimal Growth Models with Delays," CEPR Discussion Papers 5414, C.E.P.R. Discussion Papers.
  6. Mauro BAMBI & Giorgio FABBRI & Fausto GOZZI, 2010. "Optimal policy and consumption smoothing effects in the time-to-build AK model," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2010029, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  7. Boucekkine, Raouf & de la Croix, David, 2003. "Information technologies, embodiment and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2007-2034.
  8. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  9. Mauro Bambi, 2006. "Endogenous growth and time to build: the AK case," Computing in Economics and Finance 2006 77, Society for Computational Economics.
  10. Geroski, P A & Walters, C F, 1995. "Innovative Activity over the Business Cycle," Economic Journal, Royal Economic Society, vol. 105(431), pages 916-28, July.
  11. Raouf, BOUCEKKINE & David, DE LA CROIX & Omar, LICANDRO, 2006. "Vintage Capital," Discussion Papers (ECON - Département des Sciences Economiques) 2006014, Université catholique de Louvain, Département des Sciences Economiques.
  12. Walde, Klaus & Woitek, Ulrich, 2004. "R&D expenditure in G7 countries and the implications for endogenous fluctuations and growth," Economics Letters, Elsevier, vol. 82(1), pages 91-97, January.
  13. Raouf Boucekkine, 2000. "Information, Technology, Embodiment And Growth," Computing in Economics and Finance 2000 240, Society for Computational Economics.
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