Maliar, L. and S. Maliar
Macroeconomic Dynamics – 8/5, 1-23

Keywords: Endogenous Growth, Endogenous Business Cycles, Innovation, R&D, Technological Progress, RBC

Abstract: This paper presents a computable general equilibrium model of endogenous (stochastic) growth and cycles that can account for two key features of the aggregate data: balanced growth in the long run and business cycles in the short run. The model is built on Schumpeter’s idea that economic development is the consequence of the periodic arrival of innovations. There is growth because each subsequent innovation leads to a permanent improvement in the production technology. Cycles arise because innovations trigger a reallocation of resources between production and R&D. The quantitative implications of the calibrated version of our model are very similar to those of Kydland and Prescott’s (1982) model. Moreover, under some parameterizations, our model can correct two shortcomings of RBC models: It can account for the persistence in output growth and the asymmetry of growth within the business cycle.