An R&D-based Real Business Cycle Model

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

Research output: Contribution to journalArticle

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 pages32
JournalInternational Review of Economics
Volume63
Issue number4
Early online date20 May 2016
DOIs
Publication statusPublished - Dec 2016
Externally publishedYes

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