Twin Engines of Growth

We develop an endogenous growth model in which new technology and new skills are bounded complements they complement each other up to a point, but beyond this the impact of each factor is constrained by the level of the other. As a result, both technological progress and human capital accumulation are necessary for sustained productivity growth, but neither alone is sufficient. Rapid technological progress generates increased returns to education and encourages each generation to spend more time in school. Rapid human capital accumulation increases the feasibility and profitability of innovation and encourages the private business sector to allocate more resources towards R&D. Our model has important implications for the effectiveness of alternative growth promoting policies, for the interpretation of the empirical relationship between growth and schooling, and for the relationship between growth and intergenerational wage dispersion. Keywords: Endogenous technological change, endogenous human capital accumulation, minimum skill requirements, bounded complementarity.Endogenous technological change, endogenous human capital accumulation, minimum skill requirements, bounded complementarity.

Growth, Cycles and Welfare: A Schumpeterian Perspective

We use a Schumpeterian model in which both the economy's growth rate and its volatility are endogenously determined to assess some welfare and policy implications associated with business cycle fluctuations. Because it features a higher average growth rate than its acyclical counterpart, steady-state welfare is higher along the cyclical equilibrium growth path of the model. We assess the impact of alternative stabilization policies designed to smooth cyclical fluctuations. Although, it is possible to significantly reduce the variance of output growth via simple policy measures, the welfare benefits are at best negligible and at worst completely offset by the resulting reduction long-term productivity growth.Endogenous cycles, Endogenous growth, Welfare, Stabilization policy

Twin Engines of Growth

We develop an endogenous growth model in which new technology and new skills are bounded complements -- they complement each other to a point, but beyond this the impact of each factor is constrained by the level of the other. As a result, both technological progress and human capital accumulation are necessary for sustained productivity growth, but neither alone is sufficient. Rapid technological progress generates increased returns to education and encourages each generation to spend more time at school. Rapid human capital accumulation increases the feasability and profitability of innovation and encourages the private business sector to allocate more resources towards R&D. Our model has important implications for the effectiveness of alternative growth-promoting policies, for the interpretation of the empirical relationship between growth and schooling, and for the relationship between growth and intergenerational wage dispersion. Nous développons un modèle de croissance endogène dans lequel la nouvelle technologie et les nouvelles compétences sont des compléments limités -- elles se complémentent jusqu'à un certain point, au delà duquel l'impact de chaque facteur est contraint par le niveau de l'autre. Alors, le progrès technologique et l'accumulation de capital humain sont nécessaires les deux pour une croissance soutenue de la productivité, mais aucun n'est suffisant seul. Un progrès technologique rapide génère des rendements croissants de l'éducation et encourage chaque génération à consacrer plus de temps à l'école. Une accumulation rapide de capital humain accroît la faisabilité et la profitabilité de l'innovation et encourage le secteur privé à allouer plus de ressources en recherche et développement. Notre modèle a des implications importantes pour la relation empirique entre croissance et éducation, et pour la relation entre croissance et dispersion intergénérationnelle des salaires.Endogenous technological change, endogenous human capital accumulation, minimum skill requirements, bounded complementarity

Intrinsic Business Cycles with Pro-Cyclical R&D

Recent empirical work finds that R&D expenditures are quite procyclical, even for firms that are not redit-constrained during downturns. This has been taken as strong evidence against Schumpeterian-style theories of business cycles that emphasize the idea that downturns in production may be good times to allocate labor towards innovative activities. Here we argue that the procyclicality of R&D investment is, in fact, quite consistent with at least one of these theories. In our analysis, we emphasize three key features of R&D investment relative to other types of innovative activity: (1) it uses knowledge intensively, (2) it is a long-term investment with uncertain applications and (3) it suffers from diminishing returns over time.Schumpeterian, R&D investment, endogenous cycles, endogenous growth

Co-movement, Capital and Contracts: 'Normal' Cycles Through Creative Destruction

We develop a unified theory of endogenous business cycles in which expansions are neoclassical growth periods driven by productivity improvements and capital accumulation, while downturns are the result of Keynesian contractions in aggregate demand below potential output. Recessions allow skilled labor to be reallocated to growth promoting activities which fuel subsequent expansions. However, rigidities in production and contractual limitations, inherent to the process of creative destruction, leave capital severely underutilized. A key feature of our equilibrium is the endogenous emergence of long term supply contracts between capitalist owners and producers.Long-term contracting;investment irreversibility;putty-clay technology;asset- specificity;Endogenous cycles and growth

Using Financial Market Information to Enhance Canadian Fiscal Policy

In this article we argue that the evaluation and implementation of Canadian fiscal policy could be significantly improved through the systematic use of information provided by global financial markets. In particular, we show how the information contained in internationally traded asset returns can be used to (1) provide a more meaningful cyclical-adjustment of the budget deficit, (2) assess the sustainability of the public debt, and (3) reduce the risk of the debt becoming unsustainable without having to run excessively large surpluses.Public debt, cyclically-adjusted deficit, sustainability, hedging

Fiscal Shocks and Fiscal Risk Management

We use the returns on a set of international financial securities to identify exogenous shocks to the Canadian federal surplus. We find that a large portion of the variation in the surplus can be replicated by a linear combination of these returns and that the rising debt observed in the 1980s and 1990s was a result of adverse exogenous shocks and a delayed response by the government to these shocks. We develop a formal framework to evaluate the potential gains from a fiscal risk management strategy, using these securities to hedge against exogenous shocks. We show that fiscal risk management can generate significant welfare gains by enhancing the sustainability of fiscal policy and thereby lowering average tax rates.Fiscal policy, sustainability, asset pricing, risk management.

Animal Spirits Meets Creative Destruction

We show how a Schumpeterian process of creative destruction can induce coordination in the timing of entrepreneurial activities across diverse sectors of the economy.Consequently, a multi-sector economy, in which sector-specific, productivity improvements are made by independent, profit-seeking entrepreneurs, can exhibit regular booms, slowdowns and downturns as an inherent part of the long-run growth process.The cyclical equilibrium that we study has a higher long-run growth rate but lower welfare than the corresponding acyclical one.We find that the cycles generated by our model share some features of actual business cycles, and that across cycling economies, a negative relationship emerges between volatility and growth.economic growth;entrepreneurship;innovation;business cycles

I - Q Cycles

We develop a model of 'intrinsic' business cycles, driven by the decentralized behaviour of entrepreneurs and firms making continuous, divisible improvements in their productivity. We show how equilibrium cycles, associated with strategic delays in implementation and endogenous innovation, arise even in the presence of reversible investment. We derive the implications for the cyclical evolution of both tangible (physical) and intangible (knowledge) capital. In particular, our framework is consistent with key aspects of the somewhat puzzling relationship between fixed capital formation and the stockmarket at business cycle frequencies.Tobin's Q, fixed capital formation, intangible investment, cycles and growth

Getting Over the Hump: A Theory of Crime, Credit and Accumulation

We explore the implications of endogenous credit market imperfections for the relationship between property crime and the process of economic development. In the initial stages of development, property crime rises as the opportunities to gain from illegal activities expand. In later stages, however, crime falls as capital market imperfections are overcome and legal activities become more profitable. We detail the forces which determine whether the crime generated by an economy's early growth will choke off the development process. We also find that endogenous credit constraints reduce the effectiveness of public expenditures that raise expected criminal sanctions, and that spending on ex ante crime prevention may be more cost-effective. Nous construisons un modèle dans lequel la capacité de l'économie à se développer est déterminée de façon endogène par l'interaction entre les ratés du marché du capital et le taux de crime contre la propriété. Dans les premiers stades du développement économique, les crimes contre la propriété croissent en même temps que la richesse s'accumule, les gains que procure l'activité criminelle étant alors d'autant plus élevés. Mais dans les stades de développement ultérieurs, ces crimes diminuent au fur et à mesure que la richesse s'accumule car les ratés du marché du capital sont de moins en moins importants. Dans certaines économies, les crimes contre la propriété, observables dans les premiers stades du développement, ralentissent et éventuellement arrêtent la croissance économique, alors que dans d'autres, l'économie poursuit sa croissance et atteint la phase de déclin de l'activité criminelle. Insistant sur l'importance des ratés endogènes du marché du capital, nous analysons également l'impact de politiques publiques de prévention et de dissuasion du crime.Crime, property rights economic development, credit markets