On the Cyclicality of Research and Development∗

Abstract

Economists have recently argued recessions play a useful role in fostering growth. Yet a major source of growth, R&D, is procyclical. This paper argues one reason for procyclical R&D is a dynamic externality inherent to R&D that makes entrepreneurs short-sighted and concentrate their innovation in booms even when it is optimal to concentrate it in recessions. Additional forces may imply that procyclical R&D is desirable, but equilibrium R&D is likely to be too procyclical, and macroeconomic shocks are likely to be overly persistent and make growth more costly than in the absence of such shocks. ∗I am grateful to the editor and two anonymous referees who made extremely valuable suggestions in improving the paper. I would also like to thank Jeff Campbell, Marty Eichenbaum, Jonas Fisher, Huw Lloyd-Ellis, Merritt Lyon, Kiminori Matsuyama, Alex Monge, Joanne Roberts, and Fabrizio Zilibotti for their comments, as well as seminar participants at Northwestern, the Stockholm School of Economics, Queens’ University, the London School of Economics, the NBER Summer Workshop, the Canadian Macro Study Group, and the Society of Economic Dynamics.

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Cite this paper

@inproceedings{Barlevy2006OnTC, title={On the Cyclicality of Research and Development∗}, author={Gadi Barlevy and Kiminori Matsuyama and Alex Monge and Joanne Roberts}, year={2006} }