Growing through Cycles in an Infinitely Lived Agent Economy

This paper develops an infinitely-lived representative agent economy, in which the relative contribution of the two engines of growth, investment and innovation, changes endogenously over time.

Abstract

This paper extends the analysis of K. Matsuyama (Econometrica67 (1999), 335–347) to the case of an infinitely lived representative agent economy. The economy grows endogenously through endogenous fluctuations, perpetually moving back and forth between two phases. In one phase, there is no innovation, the market structure is competitive, and the economy grows solely by capital accumulation. In the other phase, new goods are introduced and the market structure is monopolistic. In the long run, both investment and innovation grow at the same rate, but the economy alternates between the periods of high investment and the periods of higher innovation. Journal of Economic Literature Classification Numbers: E32, O11.