Endogenous Growth and Wave-Like Business Fluctuation

version: September 2011<br><br>This paper is intended to answer why and how innovation activities promoting economic growth may indeed induce economic fluctuations. To this purpose, it adds an adoption lag to an otherwise standard endogenous growth model with expanding product variety. It shows that the equilibrium path admits a Hopf bifurcation where consumption, R&D and output permanently fluctuate. When adjusting to environmental changes would require some concentration of innovation activities, the associated mass of new businesses will become eventually operative at some point in the future injecting additional resources to the economy. Consumption smoothing will create a new wave of innovations, repeating it again and again as time passes. A simple quantitative exercise shows that such an endogenous mechanism relating the sources of growth and business fluctuations is not only theoretically possible but quantitatively relevant. Finally, the paper quantitatively finds that a procyclical 10% subsidy rate halving consumption fluctuations will increase the growth rate from 2.4% to 3.4% with a 9.6% increase in welfare, from which 6.3% comes from consumption smoothing.