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Journal of Economic Growth

, 16:257 | Cite as

Optimal research and development and the cost of business cycles

  • Galo NuñoEmail author
Article

Abstract

While research and development (R&D) investment has been procyclical in the post-war period, recent literature suggests that the optimal path for R&D is countercyclical, and that the economy would be better off by subsidizing R&D in recessions. The objective of this paper is to analyze the welfare effects of distortions in the intertemporal allocation of R&D resources and to compare diverse policy interventions so as to improve social welfare. To this end, we introduce a calibrated dynamic stochastic general equilibrium model with Schumpeterian endogenous growth that is capable of explaining the observed procyclicality of R&D. Our results show that the cost of business cycles is lower in the decentralized economy with procyclical R&D than in the efficient allocation with countercyclical R&D. This is because the suboptimal propagation of shocks in the decentralized equilibrium offsets some of the existing steady-state distortions. In this second-best context, countercyclical R&D subsidies have no positive effect on welfare. In contrast, fiscal policies aimed at restoring the optimal steady-state produce large welfare gains.

Keywords

Schumpeterian growth Technology adoption Optimal subsidy 

JEL classification

E32 O38 O40 

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Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Banco de EspañaMadridSpain

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