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Medium-frequency cycles and the remarkable near trend-stationarity of output

  • Tom Holden

    (University of Surrey)

This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that generates large medium-frequency cycles while robustly matching the near trend-stationary path of observed output. This requires a model in which standard business cycle shocks lead to highly persistent movements around trend, without significantly altering the trend itself. The robustness of the trend also requires that we eliminate the scale effects and knife edge assumptions that plague most growth models. In our model, when products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, and shocks that affect invention rates change the proportion of industries with advanced technologies. In an estimated version of our model, a financial-type shock to the stock of ideas emerges as the key driver of the medium frequency cycle.

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File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/2012/DP14-12.pdf
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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1412.

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Length: 59 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:sur:surrec:1412
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