Abhatoo - Centre Nationale de Documentation

Empirically R&D expenditure moves pro-cyclically, but the pro-cyclicality is a puzzle from the Schumpeterian point of view. The paper examines the cyclical property of R&D expenditure in the context of endogenous growth, and concludes that (i) substitutability between investing in physical capital and investing in technology/knowledge is a key of the cyclical property of R&D, (ii) basically technology shocks accompany counter-cyclical R&D and demand shocks accompany pro-cyclical R&D, and (iii) the easiest way to solve the pro-cyclical R&D puzzle is to abandon the conjecture that business cycles are generated mainly by technology shocks.