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Intrinsic Business Cycles with Pro-Cyclical R&D

Author

Listed:
  • Patrick Francois

    () (University of British Columbia)

  • Huw Lloyd-Ellis

    () (Queen's University)

Abstract

Recent empirical work finds that R&D expenditures are quite procyclical, even for firms that are not redit-constrained during downturns. This has been taken as strong evidence against Schumpeterian-style theories of business cycles that emphasize the idea that downturns in production may be good times to allocate labor towards innovative activities. Here we argue that the procyclicality of R&D investment is, in fact, quite consistent with at least one of these theories. In our analysis, we emphasize three key features of R&D investment relative to other types of innovative activity: (1) it uses knowledge intensively, (2) it is a long-term investment with uncertain applications and (3) it suffers from diminishing returns over time.

Suggested Citation

  • Patrick Francois & Huw Lloyd-Ellis, 2006. "Intrinsic Business Cycles with Pro-Cyclical R&D," Working Papers 1102, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1102
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1102.pdf
    File Function: First version 2006
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    References listed on IDEAS

    as
    1. Nickell, Stephen & Nicolitsas, Daphne & Patterson, Malcolm, 2001. " Does Doing Badly Encourage Management Innovation?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(1), pages 5-28, February.
    2. Klaus Wälde, 2005. "Endogenous Growth Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 867-894, August.
    3. Gadi Barlevy, 2005. "Why don't recessions encourage more R&D spending?," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Nov.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Michelle Alexopoulos, 2011. "Read All about It!! What Happens Following a Technology Shock?," American Economic Review, American Economic Association, vol. 101(4), pages 1144-1179, June.

    More about this item

    Keywords

    Schumpeterian; R&D investment; endogenous cycles; endogenous growth;

    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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