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Product innovation and the business cycle

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  • Boyan Jovanovic
  • Saul Lach

Abstract

Micreconomic data show two important facts about new products. First, some products are more important than others. Second, it takes them years to penetrate the market significantly. The authors' calibrated model with these features overpredicts the autocovariance of U.S. GNP at long lags but underpredicts it at short lags. The latter is not surprising since the model leaves out other obvious high-frequency shocks. The puzzle is why the U.S. GNP data do not show stronger autocorrelation at higher lags. A surprising finding is that, while the speed of diffusion has huge level effects, it plays a minor role in shaping the business cycle. Copyright 1997 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Suggested Citation

  • Boyan Jovanovic & Saul Lach, 1995. "Product innovation and the business cycle," Finance and Economics Discussion Series 95-46, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:95-46
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    References listed on IDEAS

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    1. Cooley, Thomas F. & Hansen, Gary D., 1992. "Tax distortions in a neoclassical monetary economy," Journal of Economic Theory, Elsevier, vol. 58(2), pages 290-316, December.
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    7. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    9. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
    10. Christiano, Lawrence J., 1988. "Why does inventory investment fluctuate so much?," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 247-280.
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    Keywords

    Business cycles ; Productivity;

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