Article ID Journal Published Year Pages File Type
986493 Review of Economic Dynamics 2015 21 Pages PDF
Abstract

•I introduce stochastic imitation to an endogenous growth model.•The composition of product changes over the business cycle.•The model is able to match the equity premium data with a recursive utility.

This paper constructs a simple endogenous growth model featuring the product cycle, i.e., the transition from monopoly to perfect competition, and studies its implications for both asset market and business cycle statistics. I find that the product cycle is a powerful amplification mechanism; the model incorporating the product cycle is able to generate nearly twice as large an equity premium as the model without the product cycle and, as a result, matches the equity premium data. The current paper thereby contributes to advancing a promising theory on the economic sources of long-run risks, postulating that innovation and R&D cause long-run uncertainties in economic growth.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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