THE EFFECT OF BUSINESS CYCLES ON GROWTH: KEYNES VS. SCHUMPETER |
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| Authors: | VIVEK H. DEHEJIA NICHOLAS ROWE |
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| Affiliation: | Assistant Professor, School of International Affairs, Carleton University, Ottawa, Canada, and CEPR Phone 1–613–520–6661, Fax 1–613–520–2889 E-mail;Associate Professor, Department of Economics, Carleton University, Phone 1–613–520–3773 Fax 1–613–520–3906 E-mail |
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| Abstract: | In contrast to recent 'neo-Schumpeterian' models, which argue that business cycles are good for growth, we develop a 'neo-Keynesian' model, where monopolistically competitive firms set prices and produce output in advance of the realization of (stochastic) monetary velocity. In such a setting, there is an asymmetry in the effect of business cycles on income: recessions are bad, because the representative firm is demand-constrained and its unsold output is wasted, but booms are not good, because the firm is output-constrained and cannot produce any more output. A more severe business cycle thus reduces the expected income of a firm, and the expected return to investment, which reduces the growth rate of the economy. ( JEL E32, E52, O41, L13) |
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