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THE EFFECT OF BUSINESS CYCLES ON GROWTH: KEYNES VS. SCHUMPETER
Author(s) -
DEHEJIA VIVEK H.,
ROWE NICHOLAS
Publication year - 1998
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1998.tb01731.x
Subject(s) - economics , business cycle , recession , investment (military) , boom , keynesian economics , monetary economics , microeconomics , macroeconomics , environmental engineering , political science , law , engineering , politics
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)