Schumpeterian Growth and Endogenous Business Cycles

Abstract

This paper looks at the linkages between growth and business cycles by bringing together two strands of literature. We incorporate a quality ladders engine of growth into an otherwise standard real business cycle model. We are interested in whether the process which leads to technological improvement over time, is also a good candidate for the process which leads to business cycles. We use a standard real business cycle approach to solve for rules of motion in our state variables and proceed to generate artificial time series. We compare the statistical properties of these series with their historical counterparts to determine if the model mimics the real world closely. One advantage our approach has over the standard approach is that the trend component is included in our artifical series just as it is in the data. Hence, we are not tied to any particular filtering method when we compare simulations with the real world data. Quantitative analysis reveals the model is capable of accounting for key features of fluctuations at various frequencies. Moreover, the model can do so without relying as heavily on highly persistent exogenous shocks as standard models must.