Innovation, Business Cycles, and the Climate Transition

Känzig, Diego, Maximilian Konradt, Lixing Wang and Donghai Zhang

No 21955, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study how business cycle fluctuations shape the pace and direction of innovation. Non-green innovation is procyclical, while green innovation is countercyclical, both over the cycle and in response to economic shocks. We explain this divergence in a dynamic general equilibrium model with endogenous green and non-green innovation. Green patents derive more value from distant profits, making green innovation less sensitive to short-run fluctuations. Endogenous innovation costs reinforce this mechanism, making green and non-green innovation effective substitutes. Evidence from market-implied patent valuations and scientist earnings supports the mechanism. The model implies larger and greener effects of innovation subsidies during downturns.

Keywords: Green; innovation (search for similar items in EconPapers)
JEL-codes: E32 O31 Q55 Q58 (search for similar items in EconPapers)
Date: 2026-09
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