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Simultaneous Innovation and the Cyclicality of R&D

Miroslav Gabrovski ()

No 201813, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: There is ample evidence that R&D investment is mildly pro-cyclical. Whereas the existing literature can explain the positive correlation between investment in R&D and output, the moderate strength of the relationship remains under-explored. This paper develops a stochastic expanding-variety endogenous growth model that accounts for the observed mild pro-cyclicality of R&D. In the model, several firms may simultaneously make the same innovation. Research projects innovated by many firms simultaneously are of higher quality, on average, and contribute relatively more to the expansion of the knowledge stock in the economy. This delivers an endogenous mechanism that breaks the otherwise perfect correlation between R&D and output. A calibration of our model closely matches the cyclical properties of R&D.

Keywords: Simultaneous Innovation; Research and Development; Medium-Term Cycles; Macroeconomic Fluctuations; Endogenous Cycles (search for similar items in EconPapers)
JEL-codes: O30 O40 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ino, nep-mac, nep-sbm and nep-tid
Date: 2018-10
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http://www.economics.hawaii.edu/research/workingpapers/WP_18-13.pdf First version, 2018 (application/pdf)

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