The opportunity cost hypothesis and the cyclical behaviour of research spending

Serodio, Pedro ORCID: https://orcid.org/0000-0001-8835-1611 (2020) The opportunity cost hypothesis and the cyclical behaviour of research spending. Working Paper. N/A. . (Published online first)

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Abstract

Schumpeter’s memorable aphorism of ”creative destruction” has spawned numerous important contributions in the study of economic growth but there has been substantially less attention paid to his hypothesis that R&D expenditure should display counter-cyclical features. I outline a dynamic stochastic general equilibrium model in which research expenditure drives innovation and growth, and attempt to reconcile em- pirical results suggesting both pro-cyclicality of R&D and research expenditure smooth- ing with the response of those variables in the theoretical model. It is then extended to allow for an endogenous market structure so that the behaviour of research spending at three levels of aggregation can be analysed. The model generates a behaviour of R&D spending that is broadly consistent with empirical evidence regarding its pro-cyclicality and outlines the mechanisms through which that occurs. I then briefly discuss the effect of business cycle fluctuations on the time paths of aggregate productivity and aggregate output in each of the models analysed.

Item Type: Monograph (Working Paper)
Keywords (uncontrolled): research & development, endogenous growth, cycles
Research Areas: A. > Business School > Economics
Item ID: 29148
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Depositing User: Pedro Matos Serodio
Date Deposited: 04 Mar 2020 15:38
Last Modified: 04 Mar 2020 15:38
URI: https://eprints.mdx.ac.uk/id/eprint/29148

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