R&D and Aggregate Fluctuations

52 Pages Posted: 9 Apr 2012

See all articles by Erhan Artuc

Erhan Artuc

World Bank; World Bank - Development Research Group (DECRG)

Panayiotis M. Pourpourides

Cardiff University - Cardiff Business School

Date Written: April 9, 2012

Abstract

The research and development (R&D) sector is considered one of the main driving forces of sustainable growth in the long run. The sector, however, also shows excessive volatility which raises interesting questions regarding the sources of this volatility as well as the nature of the relation between the sector and aggregate fluctuations. Using data from the United States Bureau of Economic Analysis and National Science Foundation, we show that technology innovations are the main source of fluctuations in R&D investment while R&D technology shocks are important in driving aggregate output fluctuations. After taking nominal innovations into consideration, such as shocks in monetary policy and inflation, capital investment-specific shocks explain 70 percent of fluctuations of R&D investment, while R&D technology shocks explain 30 percent of the variation in the output of the non-R&D sector. Technology innovations jointly explain most of the variation of output in the R&D sector and 78 percent of the variation of output in the rest of the economy.

Keywords: Cycles, Productivity Shocks, Investment-specific Shocks, R&D, VAR

JEL Classification: C13, C32, C68, E32, O3

Suggested Citation

Artuc, Erhan and Pourpourides, Panayiotis M., R&D and Aggregate Fluctuations (April 9, 2012). World Bank Policy Research Working Paper No. 6017. Available at SSRN: https://ssrn.com/abstract=2037417 or http://dx.doi.org/10.2139/ssrn.2037417

Erhan Artuc (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Panayiotis M. Pourpourides

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom

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