Endogenous fluctuations with procyclical R&D

The literature on endogenous growth cycles predicts the countercyclical allocation of resources to R&D. However, this prediction is not supported by empirical studies. This study considers the R&D-based growth model with endogenous fluctuations introducing population growth and a negative externality that affects the productivity of R&D. We show that this simple modification makes R&D investment procyclical along sustained business cycles using both an overlapping generation framework and an infinitely-lived agent framework.

► This study considers the R&D-based growth model with endogenous fluctuations. ► The literature on endogenous growth cycles predicts the countercyclical R&D investment. ► Many empirical studies have illustrated that procyclical R&D investment is valid. ► We provide the theoretical model that achieves procyclical R&D.