Growing Through Endogenous Innovation Cycles

This paper proposes an endogenous growth model to study whether innovation activities generate business cycles. We find that fishing-out and learning-by-doing effects, which are common properties in innovation activities, generate inverted U-shaped cycles. In this paper, primary and secondary innovations are conducted in two different sectors. The primary innovation sector provides new technologies that are used by the secondary innovation sector to create new blueprints. When a new technology is introduced in the secondary innovation sector, the learning-by-doing effect initially dominates, and the growth rate increases. Subsequently, the fishing-out effect dominates, and the growth rate starts to decrease. When the productivity of the old technology is sufficiently low, the primary innovation sector realizes the profitability of developing new technology. Thus, new technology is developed, and a new cycle begins