Intrinsic Business Cycles with Pro-Cyclical R&D
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.
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- Nickell, S. & Nicolitasa, D. & Patterson, M., 1995.
"Does Doing Badly Encourage Management Innovation?,"
Economics Series Working Papers
99175, University of Oxford, Department of Economics.
- 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, 08.
- Klaus, WAELDE, 2003. "Endogenous growth cycles," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004012, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 15 Mar 2004.
- Gadi Barlevy, 2005. "Why don't recessions encourage more R&D spending?," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Nov.
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