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.

Additional Metadata
Persistent URL dx.doi.org/10.1111/j.1465-7295.1998.tb01731.x
Journal Economic Inquiry
Citation
Dehejia, V, & Rowe, N. (1998). The effect of business cycles on growth: Keynes vs. Schumpeter. Economic Inquiry, 36(3), 501–511. doi:10.1111/j.1465-7295.1998.tb01731.x