Technological Innovation, Diffusion and Business Cycle Dynamics

David Andolfatto () and Glenn Macdonald ()
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Glenn Macdonald: University of Rochester

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: In the U.S. economy, real output growth is forecastable with its own lag and the lagged consumption-output ratio. With technological progress modeled as a random walk, standard real-business-cycle (RBC) models fails to replicate this fact: these models generate equilibrium output dynamics, leading some researchers to question the empirical relevance of technology shocks for generating business cycle dynamics. In this paper, we develop a model economy that exhibits endogenous stochastic growth with aggregate fluctuations driven by technology shocks that are absorbed with some lag, reflecting the costly and time-consuming nature of innovation and diffusion. Our purpose is to compare the resulting business cycle dynamics with those predicted by standard RBC models, which implicitly assume the instantaneous diffusion of new technology. Unlike the standard RBC model, the environment studied here generates business cycle dynamics that better resemble observed patterns.

Keywords: real-business-cycle; RBC; business cycle dynamics (search for similar items in EconPapers)
Date: 1995-06
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Working Paper: Technological Innovation, Diffusion, and Business Cycle Dynamics (1995)
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