Schumpeterian growth and endogenous business cycles

This paper contains a dynamic general equilibrium model with an endogenous process for growth and business cycles driven partly by technological discovery and diffusion. The model integrates two branches of the literature. One is literature on Schumpeterian, or \"quality ladder,\" models, in which growth is driven endogenously by attempts to innovate in order to capture monopoly rents and in which the focus is on low-frequency fluctuations in variables. The other is the real business cycle literature, in which the focus is on high-frequency fluctuations driven by exogenous productivity shocks. The model in this paper has Schumpeterian-style low-frequency fluctuations stemming from technological discovery in the form of random successes in endogenous research and development efforts. Diffusion of innovations in applied research into basic know-how, along with random shocks to productivity, drives high-frequency fluctuations. Properties of high- and low-frequency fluctuations in data d rawn from simulations of a parameterized version of the model are compared to like properties of data drawn from the postwar U.S. economy. The model accounts for key properties of actual data without heavy reliance on the exogenous, highly persistent, and volatile shocks to productivity typically used in real business cycle analysis.