An R&D-based real business cycle model

Ka Wai Terence Fung, Chi Keung Lau, Kwok Ho Chan

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    Abstract

    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.
    Original languageEnglish
    Pages (from-to)327-358
    Number of pages31
    JournalInternational Review of Economics
    Volume63
    Issue number4
    Early online date20 May 2016
    DOIs
    Publication statusPublished - Dec 2016

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