IDEAS home Printed from https://ideas.repec.org/p/war/wpaper/2017-26.html
   My bibliography  Save this paper

Innovation and endogenous growth over business cycle with frictional labor markets

Author

Listed:
  • Marcin Bielecki

    (Faculty of Economic Sciences, University of Warsaw; Narodowy Bank Polski)

Abstract

This paper proposes a microfounded model featuring frictional labor markets that generates procyclical R&D expenditures as a result of optimizing behavior by heterogeneous monopolistically competitive firms. This allows to show that business cycle fluctuations affect the aggregate endogenous growth rate of the economy. Consequently, transitory shocks leave lasting level effects. This mechanism is responsible for economically significant hysteresis effects that increase the welfare cost of business cycles by two orders of magnitude relative to the exogenous growth model. I show that this has serious policy implications and creates ample space for policy intervention. I find that several static and countercyclical subsidy schemes are welfare improving.

Suggested Citation

  • Marcin Bielecki, 2017. "Innovation and endogenous growth over business cycle with frictional labor markets," Working Papers 2017-26, Faculty of Economic Sciences, University of Warsaw.
  • Handle: RePEc:war:wpaper:2017-26
    as

    Download full text from publisher

    File URL: http://www.wne.uw.edu.pl/index.php/download_file/3959/
    File Function: First version, 2017
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andrea Bassanini & Luca Nunziata & Danielle Venn, 2009. "Job protection legislation and productivity growth in OECD countries [Appropriate growth policy: a unifying framework]," Economic Policy, CEPR;CES;MSH, vol. 24(58), pages 349-402.
    2. Da-Rocha, José-María & Restuccia, Diego & Tavares, Marina Mendes, 2019. "Firing costs, misallocation, and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 98(C), pages 60-81.
    3. Daniel Garcia‐Macia & Chang‐Tai Hsieh & Peter J. Klenow, 2019. "How Destructive Is Innovation?," Econometrica, Econometric Society, vol. 87(5), pages 1507-1541, September.
    4. Evans, David S, 1987. "The Relationship between Firm Growth, Size, and Age: Estimates for 100 Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 567-581, June.
    5. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
    6. Barbara Petrongolo & Christopher A. Pissarides, 2008. "The Ins and Outs of European Unemployment," American Economic Review, American Economic Association, vol. 98(2), pages 256-262, May.
    7. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    8. Todd Messer & Michael Siemer & Francois Gourio, 2016. "A Missing Generation of Firms? Aggregate Effects of the Decline in New Business Formation," 2016 Meeting Papers 752, Society for Economic Dynamics.
    9. Lee, Yoonsoo & Mukoyama, Toshihiko, 2015. "Entry and exit of manufacturing plants over the business cycle," European Economic Review, Elsevier, vol. 77(C), pages 20-27.
    10. Jeffrey Campbell, 1998. "Entry, Exit, Embodied Technology, and Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 371-408, April.
    11. Acemoglu, Daron & Cao, Dan, 2015. "Innovation by entrants and incumbents," Journal of Economic Theory, Elsevier, vol. 157(C), pages 255-294.
    12. Toshihiko Mukoyama & Sophie Osotimehin, 2019. "Barriers to Reallocation and Economic Growth: The Effects of Firing Costs," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 235-270, October.
    13. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
    14. Richard Ericson & Ariel Pakes, 1995. "Markov-Perfect Industry Dynamics: A Framework for Empirical Work," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 53-82.
    15. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 43-61.
    16. Jaimovich, Nir & Floetotto, Max, 2008. "Firm dynamics, markup variations, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1238-1252, October.
    17. Satyajit Chatterjee & Russell Cooper, 2014. "Entry And Exit, Product Variety, And The Business Cycle," Economic Inquiry, Western Economic Association International, vol. 52(4), pages 1466-1484, October.
    18. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    19. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    20. Ariel Pakes & Paul McGuire, 1994. "Computing Markov-Perfect Nash Equilibria: Numerical Implications of a Dynamic Differentiated Product Model," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 555-589, Winter.
    21. Robert Shimer, 2012. "Reassessing the Ins and Outs of Unemployment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(2), pages 127-148, April.
    22. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2011. "Introducing financial frictions and unemployment into a small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 1999-2041.
    23. Esteban Rossi-Hansberg & Mark L. J. Wright, 2007. "Establishment Size Dynamics in the Aggregate Economy," American Economic Review, American Economic Association, vol. 97(5), pages 1639-1666, December.
    24. Lucia Foster & John C. Haltiwanger & C. J. Krizan, 2001. "Aggregate Productivity Growth: Lessons from Microeconomic Evidence," NBER Chapters, in: New Developments in Productivity Analysis, pages 303-372, National Bureau of Economic Research, Inc.
    25. Isabel Cairó & Tomaz Cajner, 2018. "Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability," Economic Journal, Royal Economic Society, vol. 128(609), pages 652-682, March.
    26. Daron Acemoglu & Ufuk Akcigit & Harun Alp & Nicholas Bloom & William Kerr, 2018. "Innovation, Reallocation, and Growth," American Economic Review, American Economic Association, vol. 108(11), pages 3450-3491, November.
    27. Ufuk Akcigit & William R. Kerr, 2018. "Growth through Heterogeneous Innovations," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1374-1443.
    28. Shigeru Fujita, 2004. "Vacancy persistence," Working Papers 04-23, Federal Reserve Bank of Philadelphia.
    29. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    30. Christopher Laincz & Pietro Peretto, 2006. "Scale effects in endogenous growth theory: an error of aggregation not specification," Journal of Economic Growth, Springer, vol. 11(3), pages 263-288, September.
    31. Hopenhayn, Hugo & Rogerson, Richard, 1993. "Job Turnover and Policy Evaluation: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 915-938, October.
    32. Tor Jakob Klette & Samuel Kortum, 2004. "Innovating Firms and Aggregate Innovation," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 986-1018, October.
    33. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
    34. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    35. Devereux, Michael B. & Head, Allen C. & Lapham, Beverly J., 1996. "Aggregate fluctuations with increasing returns to specialization and scale," Journal of Economic Dynamics and Control, Elsevier, vol. 20(4), pages 627-656, April.
    36. Peretto, Pietro F, 1998. "Technological Change and Population Growth," Journal of Economic Growth, Springer, vol. 3(4), pages 283-311, December.
    37. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    38. Hugo A. Hopenhayn, 2014. "Firms, Misallocation, and Aggregate Productivity: A Review," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 735-770, August.
    39. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    40. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
    41. Marcin Bielecki, 2017. "Business cycles, innovation and growth: welfare analysis," Working Papers 2017-19, Faculty of Economic Sciences, University of Warsaw.
    42. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    43. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
    44. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 671-698.
    45. Steven J. Davis & John Haltiwanger, 2014. "Labor Market Fluidity and Economic Performance," NBER Working Papers 20479, National Bureau of Economic Research, Inc.
    46. Peter Howitt, 1999. "Steady Endogenous Growth with Population and R & D Inputs Growing," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 715-730, August.
    47. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
    48. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-1150, September.
    49. Dinopoulos, Elias & Thompson, Peter, 1998. "Schumpeterian Growth without Scale Effects," Journal of Economic Growth, Springer, vol. 3(4), pages 313-335, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marcin Bielecki, 2017. "Long shadows of financial shocks: an endogenous growth perspective," Working Papers 2017-22, Faculty of Economic Sciences, University of Warsaw.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marcin Bielecki, 2017. "Long shadows of financial shocks: an endogenous growth perspective," Working Papers 2017-22, Faculty of Economic Sciences, University of Warsaw.
    2. Marcin Bielecki, 2017. "Business cycles, innovation and growth: welfare analysis," Working Papers 2017-19, Faculty of Economic Sciences, University of Warsaw.
    3. Acemoglu, Daron & Cao, Dan, 2015. "Innovation by entrants and incumbents," Journal of Economic Theory, Elsevier, vol. 157(C), pages 255-294.
    4. Argente, David & Lee, Munseob & Moreira, Sara, 2018. "Innovation and product reallocation in the great recession," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 1-20.
    5. Laurent Cavenaile & Pau Roldan-Blanco, 2021. "Advertising, Innovation, and Economic Growth," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(3), pages 251-303, July.
    6. Lu, You-Xun & Chen, Shi-kuan & Lai, Ching-chong, 2022. "Monetary Policy and Economic Growth in a Schumpeterian Model with Incumbents and Entrants," MPRA Paper 112177, University Library of Munich, Germany.
    7. repec:eee:labchp:v:3:y:1999:i:pb:p:2711-2805 is not listed on IDEAS
    8. Masashige Hamano & Francesco Zanetti, 2017. "Endogenous Turnover and Macroeconomic Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 263-279, October.
    9. Gil, Pedro Mazeda, 2010. "Stylised facts and other empirical evidence on firm dynamics, business cycle and growth," Research in Economics, Elsevier, vol. 64(2), pages 73-80, June.
    10. Lee, Yoonsoo & Mukoyama, Toshihiko, 2018. "A model of entry, exit, and plant-level dynamics over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 96(C), pages 1-25.
    11. Bernstein, Joshua & Richter, Alexander W. & Throckmorton, Nathaniel A., 2021. "Cyclical net entry and exit," European Economic Review, Elsevier, vol. 136(C).
    12. Aghion, Philippe & Akcigit, Ufuk & Howitt, Peter, 2014. "What Do We Learn From Schumpeterian Growth Theory?," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 0, pages 515-563, Elsevier.
    13. Ufuk Akcigit & William R. Kerr, 2018. "Growth through Heterogeneous Innovations," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1374-1443.
    14. Yoonsoo Lee & Toshihiko Mukoyama, 2008. "Entry, Exit, and Plant-Level Dynamics over the Business Cycle," Working Papers 08-17, Center for Economic Studies, U.S. Census Bureau.
    15. Meri Davlasheridze & Pinar C. Geylani, 2017. "Small Business vulnerability to floods and the effects of disaster loans," Small Business Economics, Springer, vol. 49(4), pages 865-888, December.
    16. Cacciatore, Matteo & Ghironi, Fabio & Lee, Yurim, 2016. "Financial market integration, exchange rate policy, and the dynamics of business and employment in Korea," Journal of the Japanese and International Economies, Elsevier, vol. 42(C), pages 79-99.
    17. Lu, You-Xun & Chen, Shi-kuan & Lai, Ching-chong, 2022. "Subsidies, Entry, and Economic Growth in a Schumpeterian Model with Incumbents and Entrants," MPRA Paper 112179, University Library of Munich, Germany.
    18. Cavallari, Lilia & Romano, Simone & Naticchioni, Paolo, 2021. "The original sin: Firms’ dynamics and the life-cycle consequences of economic conditions at birth," European Economic Review, Elsevier, vol. 138(C).
    19. Rogerson, Richard & Shimer, Robert, 2011. "Search in Macroeconomic Models of the Labor Market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 7, pages Pages: 61, Elsevier.
    20. Andrea Colciago & Lorenza Rossi, 2011. "Endogenous Market Structures and Labor Market Dynamics," Quaderni di Dipartimento 139, University of Pavia, Department of Economics and Quantitative Methods, revised Feb 2011.
    21. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.

    More about this item

    Keywords

    business cycles; firm dynamics; search and matching; innovation; endogenous growth;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:war:wpaper:2017-26. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/fesuwpl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marcin Bąba (email available below). General contact details of provider: https://edirc.repec.org/data/fesuwpl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.