Hetereogeneous Firms, Growth and the Long Shadows of Business Cycles

Giammario Impullitti, Omar Licandro (), SedlÃ¡Ä ek, Petr and Adam Spencer

No 19385, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: R&D is procyclical and a crucial driver of growth. Evidence indicates that innovation activity varies widely across firms. Is there heterogeneity in innovation cyclicality? Does innovation heterogeneity matter for business cycle propagation? We provide empirical evidence that more productive firms are less procyclical in innovation. We develop a model replicating this observation, with selection as the driver of heterogeneous innovation cyclicality. We then examine how heterogeneous innovation and growth influence business cycle propagation. Dynamics of firm entry and exit, coupled with heterogeneous cyclicality, significantly amplify TFP shock propagation. Business cycle fluctuations give substantial welfare losses, with firm heterogeneity contributing significantly.

Keywords: Economic growth; Business cycle; Innovation; Heterogeneous firms (search for similar items in EconPapers)
JEL-codes: E30 E32 E40 (search for similar items in EconPapers)
Date: 2024-08
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Working Paper: Hetereogeneous firms, growth and the long shadows of business cycles (2024)
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