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Business cycles, innovation and growth: welfare analysis

Marcin Bielecki ()

No 2017-19, Working Papers from Faculty of Economic Sciences, University of Warsaw

Abstract: Endogenous growth literature treats deliberate R&D effort as the main engine of long-run growth. It has been already recognized that R&D expenditures are procyclical. This paper builds a microfounded model that generates procyclical aggregate R&D investment as a result of optimizing behavior by heterogeneous monopolistically competitive firms. I find that business cycle fluctuations affect the aggregate endogenous growth rate of the economy so that transitory shocks leave lasting level effects on the economy’s Balanced Growth Path. This result stems from both procyclical R&D expenditures of the incumbents and procyclical firm entry rates. This mechanism generates economically significant hysteresis effects, increasing the welfare cost of business cycles by two orders of magnitude relative to the exogenous growth model. Coupled with potential to affect endogenous growth rates, ample space for welfare improving policy interventions arises. The paper evaluates the effects of selected subsidy schemes and finds some of them welfare improving.

Keywords: business cycles; firm dynamics; innovation; growth; welfare analysis (search for similar items in EconPapers)
JEL-codes: E32 E37 L11 O31 O32 O38 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ino, nep-mac, nep-sbm and nep-tid
Date: 2017
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https://www.wne.uw.edu.pl/index.php/download_file/3733/ First version, 2017 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:war:wpaper:2017-19

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