International Review of Economics

, Volume 63, Issue 4, pp 327–358 | Cite as

An R&D-based real business cycle model

  • Ka Wai Terence FungEmail author
  • Chi Keung Marco Lau
  • Kwok Ho Chan
Research Article


The New Keynesian Real Business Cycle model with staggered price adjustment is augmented with an R&D producing sector. Two sources of economic shocks are considered, namely random participation (perturbances to the value of alternative investment opportunities in another sector) and financial intermediation (shocks to the cost of raising capital in the financial intermediation market). We find that, when compared to the baseline model, both models can explain procyclical R&D spending. Additionally, the investment oversensitivity problem is corrected. However, only the financial intermediation model is consistent with the observed finding that the volatility of R&D is larger than those of investment and output.


Endogenous growth model Real business cycle Asymmetric information Research and development 

JEL Classification

E3 O3 O4 



We are grateful to the comments from participants of City University of New York, Graduate Center seminar. All remaining errors are ours.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  • Ka Wai Terence Fung
    • 1
    Email author
  • Chi Keung Marco Lau
    • 2
  • Kwok Ho Chan
    • 1
  1. 1.Division of Business and ManagementUnited International CollegeZhuhaiChina
  2. 2.Newcastle Business SchoolNorthumbria UniversityNewcastle upon TyneUK

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