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Volatility costs of R&D

Uluc Aysun ()

No 2019-02, Working Papers from University of Central Florida, Department of Economics

Abstract: This paper incorporates endogenous growth into a New Keynesian DSGE framework to in-vestigate the effects of R&D on economic volatility. It identifies a mechanism through which the cyclicality of R&D and its effects on volatility depend on the cyclicality of production. R&D activity becomes more procyclical, thereby amplifying economic volatility when labor supply is procyclical. The conclusions are reversed if labor supply is countercyclical. Alterna-tive calibrations show that this link between R&D and production labor is weaker when R&D intensity, the spillover rate of innovation, and R&D adjustment costs are higher. In these cases, R&D tracks economic activity more closely which in turn magnifies economic volatility. The higher volatility has considerable welfare consequences and it implies that the steeper path of growth resulting from higher R&D activity comes at a price.

Keywords: Research and development; business cycles; endgenous growth; DSGE (search for similar items in EconPapers)
JEL-codes: E30 E32 O30 O33 (search for similar items in EconPapers)
Date: 2019-01
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