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Creative Destruction Cycles: Schumpeterian Growth in an Estimated DSGE Model

Marco Pinchetti ()

No ECARES 2017-04, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: In this paper I incorporate a Schumpeterian mechanism of creative destruction in a standard DSGE framework. In the model, a sector of forward-looking profit maximizing innovators determines the economy’s TFP growth rate. I estimate the model with Bayesian methods, and show that models featuring an endogenous TFP channel can empirically outperform models that exhibit standard, exogenous productivity dynamics. The paper provides a comprehensive comparative assessment of the impact of the endogenous TFP channel in an estimated fully-fledged DSGE model. The variance decomposition analysis shows that endogenous TFP is a powerful channel of transmission of adverse shocks throughout the business cycle. The estimates suggest that the 35% of the productivity growth rate fluctuations had endogenous origins during the Great Recession.

Keywords: DSGE model; endogenous TFP; schumpeterian growth; post-crisis slump (search for similar items in EconPapers)
JEL-codes: E50 E24 E32 O47 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-tid
Date: 2017-02
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