The Effect of Business Cycles on Growth: Keynes vs. Schumpeter

Vivek Dehejia () and Nicholas Rowe

Economic Inquiry, 1998, vol. 36, issue 3, 501-11

Abstract: In contrast to recent 'neo-Schumpeterian' models, which argue that business cycles are good for growth, the authors develop a 'neo-Keynesian' model, where monopolistically competitive firms set prices and produce output in advance of the realization of (stochastic) monetary velocity. In such a setting, there is an asymmetry in the effect of business cycles on income: recessions are bad, because the representative firm is demand-constrained and its unsold output is wasted, but booms are not good, because the firm is output-constrained and cannot produce any more output. A more severe business cycle thus reduces the expected income of a firm. and the expected return to investment, which reduces the growth rate of the economy. Copyright 1998 by Oxford University Press.

Date: 1998
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