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The basic idea of Schumpeterian Business Cycles is that new technologies require creative destruction but will yield positive growth. These two opposing forces have impacts onto the real economy at different times, which will create fluctuations around the trend.

Romer (1986) has these effects in an explicit growth model, but he neglects the business cycle fluctuations.

Has there been any literature of business cycles based on the idea of Schumpeterian Growth?

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    $\begingroup$ If you down vote, please explain why. Is the sort of question not welcome, or is it some personal bias against stories alternative to RBC? $\endgroup$ – FooBar Nov 23 '14 at 21:56
  • $\begingroup$ there has been research to support destruction of old industries as newer ones replace them. I'll try to find some studies, but I remember seeing this in text books a long time ago. $\endgroup$ – Jason Nichols Nov 23 '14 at 22:04
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I will toot my own horn and cite - Phillips and Wrase. (2006) "Is Schumpeterian ‘Creative Destruction’ a Plausible Source of Endogenous Real Business Cycle Shocks?," Journal of Economic Dynamics and Control, vol. 30 no. 11 pp. 1885-1913.

We found it difficult to match the volatility using Schumpterian mechanisms alone. The business cycle asymmetries from our model were also exactly backward. That is, a sudden discovery leads to a jump in output which slowly peters out. While recessions tend to suddenly jump downward and then slowly recover.

The mechanism in our model was that an increase in productivity due to the discovery, leads to a reallocation of resources away from innovation toward production of output and this slows down the innovation process.

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There have been examples of some papers that incorporate these ideas. They are typically housed within the endogenous growth literature. Off the top of my head, these are the papers that I think of:

  • "Endogenous Growth And Endogenous Business Cycles" by Sergui and Lilia Maliar. I haven't read this paper in awhile, but if I remember correctly, the idea is that technology innovations come slowly over time and there is a trade off between investing in production and research. I think one of the cool results of their paper was that they could capture some of the asymmetry in business cycles (but don't quote me). Would need to reread to give you a better description, it is a kind of neat paper though.

  • "A Model of Growth Through Creative Destruction" by Philippe Aghion and Peter Howitt. This paper is another that is centered on technology growth through research. Firms have a similar trade off as in the previous paper and I think what he found was that typically technology grows too quickly because firms are competing for the benefits of having the best technology. Once again, it has been awhile since I've read it.

I hope this is the type of work you were looking for.

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    $\begingroup$ Your comment reminds me that Howitt has a nice entry about endogenous growth in Palgrave, which discusses Schumpeter and puts it in context: Endogenous Growth As with you, it's been a while since I've read this. $\endgroup$ – CompEcon Nov 24 '14 at 0:40

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