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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Financial intermediation
Real business cycle models
Alternative investments
Economic shocks
New Keynesian
Costs
Price adjustment
Participation
Investment opportunities
Staggered prices

Cite this

Fung, Ka Wai Terence ; Lau, Chi Keung Marco ; Chan, Kwok Ho. / An R&D-based Real Business Cycle Model. In: International Review of Economics. 2016 ; Vol. 63, No. 4. pp. 327-358.
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An R&D-based Real Business Cycle Model. / Fung, Ka Wai Terence; Lau, Chi Keung Marco; Chan, Kwok Ho.

In: International Review of Economics, Vol. 63, No. 4, 12.2016, p. 327-358.

Research output: Contribution to journalArticle

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