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Innovation and endogenous growth over business cycle with frictional labor markets

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  • 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
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    File URL: http://www.wne.uw.edu.pl/index.php/download_file/3959/
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    Cited by:

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    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

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