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Growth, Cycles And Welfare: A Schumpeterian Perspective

Author

Listed:
  • Patrick Fracois

    (University of British Columbia)

  • Huw Lloyd-Ellis

    (Queen's University)

Abstract

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.

Suggested Citation

  • Patrick Fracois & Huw Lloyd-Ellis, 2006. "Growth, Cycles And Welfare: A Schumpeterian Perspective," Working Paper 1090, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1090
    as

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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1090.pdf
    File Function: First version 2006
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    References listed on IDEAS

    as
    1. Douglas Gale, 1996. "Delay and Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(2), pages 169-198.
    2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    3. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
    4. Gadi Barlevy, 2004. "The Cost of Business Cycles Under Endogenous Growth," American Economic Review, American Economic Association, vol. 94(4), pages 964-990, September.
    5. Shleifer, Andrei, 1986. "Implementation Cycles," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1163-1190, December.
    6. Francois, Patrick & Shi, Shouyong, 1999. "Innovation, Growth, and Welfare-Improving Cycles," Journal of Economic Theory, Elsevier, vol. 85(2), pages 226-257, April.
    7. Patrick Francois & Huw Lloyd-Ellis, 2009. "Schumpeterian Business Cycles with Pro-Cyclical R&D," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 567-591, October.
    8. Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 2001. "The welfare cost of business cycles revisited: Finite lives and cyclical variation in idiosyncratic risk," European Economic Review, Elsevier, vol. 45(7), pages 1311-1339.
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    Cited by:

    1. Mauro Boianovsky & Hans-Michael Trautwein, 2010. "Schumpeter on unemployment," Journal of Evolutionary Economics, Springer, vol. 20(2), pages 233-263, April.
    2. Houssa, Romain, 2013. "Uncertainty about welfare effects of consumption fluctuations," European Economic Review, Elsevier, vol. 59(C), pages 35-62.

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    More about this item

    Keywords

    Endogenous cycles; Endogenous growth; Welfare; Stabilization policy;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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