 Innovation and Endogenous Growth over the Business Cycle with Frictional Labor MarketsCentral European Journal of Economic Modelling and Econometrics, 2022, vol. 14, issue 3, 263-302 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 sgnificantly increase the welfare cost of business cycles relative to the exogenous growth model. I show that this has serious policy implications and creates sample space for policy intervention. I find that several static and countercyclical subsidy schemes are welfare improving. Importantly, I find that due to labor market frictions subsidizing incumbent firms generates large and positive welfare effects. Keywords: business cycles; firm dynamics; search and matching; innovation; endogenous growth (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:psc:journl:v:14:y:2022:i:3:p:263-302 Access Statistics for this article More articles in Central European Journal of Economic Modelling and Econometrics from Central European Journal of Economic Modelling and Econometrics |
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