Abstract
The purpose of this paper is to present a model of growth with endogenous fluctuations. The main feature of our model is that it throws light on the relationships between long waves and business cycles in the economy. The driving forces in the model work in this way: endogenous R&D investment creates new cumulative knowledge. When this knowledge reaches a threshold H*, radical innovations occur which generate productivity growth via the substitution of old capital with new capital. These disruptive events appear recurrently, generating long waves and revitalizing the growth process. Short-term cycles in the model come from the interactions between these innovation-driven transformations and certain prey-predator mechanisms that involve the labor market. We find that our model presents excellent properties: the model generates endogenous cyclical growth as a disequilibrium process; persistent and irregular short cycles appear interwoven with the long waves; and there is a strong significant interaction between both kinds of fluctuations.
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Notes
We may associate this leap with the emergence of a new capital-embodied critical technology. Helpman (1998) refers to these technologies as General Purpose Technologies (GPTs): steam power, electrification, the internal combustion engine and the computerization of the economy.
For Fig. 1 and for any simulation in this section, we will use Eq. 17 with the following initial values and parameters: λ 0 = 0.03; μ 0 = 0.3; β = 0.01; ρ = 6; γ = 5.4; θ = 0.3; δ = 0.04; h = 0.1; π = 0.2; v(0) = 0.91; u(0) = 0.46; k(0) = 100; η(0) = η − 1 = 0.3; a(0) = a − 1 = 1, ϕ = 0.51; H ∗ = 430. See Silverberg and Verspagen (1994) for similar values. Besides, Fig. 1b offers some similarities with the evidence provided by Harvei (2000) on Goodwin cycles in OECD countries.
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This paper has benefited from financial support under projects PO17-2000 of the Government of Aragon and SEJ 2007-60960 of the Spanish Ministry of Education and Science. The authors would like to express their thanks to Gerald Silverberg and to the anonymous referees for their comments on earlier versions of this work.