Medium frequency cycles in a stationary world

Tom Holden
Under Revision
Abstract BibTeX
Download Current Version

Existing models of endogenous growth generate implausibly large trend breaks in output when augmented with standard business cycle shocks. This paper presents a model without this deficiency, yet still capable of generating large medium-frequency fluctuations around the trend. Ensuring the robustness of the trend requires that we eliminate the strong scale effects and knife edge assumptions that plague most growth models. In our model, medium-frequency fluctuations arise from changes in the proportion of industries producing patent protected products. However, variations in the number of firms within each industry ensure that process improvement incentives remain roughly constant. An estimated version of the model matches well the observed pattern of medium frequency cycles.