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Creative destruction and business cycles

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  • Boucekkine, Raouf
  • Germain, Marc
  • Licandro, Omar

Abstract

In a dynamic general equilibrium setup, this paper aims at providing a general framework for the analysis of the role of vintages and creative destruetion on business fluctuations. By stressing the forward-looking behavior of the optimal scrapping rule, we use a standard rational expectations argument to show) in the linear utility case, the time independence of the scrapping function. Secondly, we prove that equilibrium output shows a purely periodic behavior around an exponential growth trend, the pattern of the cycle being deterrnined by the pattern of initial conditions. The vintage capital model presented in this paper provides a new view on business fluctuations: historical conditions are at the basis of business fluctuations, in the sense that historically volatile or stable econornies will reproduce their own historical pattern in the future.

Suggested Citation

  • Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1995. "Creative destruction and business cycles," UC3M Working papers. Economics 3907, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:3907
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    References listed on IDEAS

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    1. Malcomson, James M., 1975. "Replacement and the rental value of capital equipment subject to obsolescence," Journal of Economic Theory, Elsevier, vol. 10(1), pages 24-41, February.
    2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    3. Cooley, Thomas F. & Greenwood, Jeremy & Yorukoglu, Mehmet, 1997. "The replacement problem," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 457-499, December.
    4. Benhabib, Jess & Rustichini, Aldo, 1991. "Vintage capital, investment, and growth," Journal of Economic Theory, Elsevier, vol. 55(2), pages 323-339, December.
    5. Chari, V V & Hopenhayn, Hugo, 1991. "Vintage Human Capital, Growth, and the Diffusion of New Technology," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1142-1165, December.
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    1. Boucekkine, Raouf & Licandro, Omar & Paul, Christopher, 1997. "Differential-difference equations in economics: On the numerical solution of vintage capital growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 347-362.

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