Medium-frequency cycles and the remarkable near trend-stationarity of output

Tom Holden

No 1412, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: This paper builds a dynamic stochastic general equilibrium (DSGE) model of endogenous growth that generates large medium-frequency cycles while robustly matching the near trend-stationary path of observed output. This requires a model in which standard business cycle shocks lead to highly persistent movements around trend, without significantly altering the trend itself. The robustness of the trend also requires that we eliminate the scale effects and knife edge assumptions that plague most growth models. In our model, when products go out of patent protection, the rush of entry into their production destroys incentives for process improvements. Consequently, old production processes are enshrined in industries producing non-protected products, and shocks that affect invention rates change the proportion of industries with advanced technologies. In an estimated version of our model, a financial-type shock to the stock of ideas emerges as the key driver of the medium frequency cycle.

JEL-codes: E32 E37 L16 O31 O33 O34 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2012-10
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:1412

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