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Pedro Serˆ odio Room 5B.

146 Department of Economics University of Essex Wivenhoe Park, Colchester CO3 3LJ United Kingdom

Research Statement My research interests lie at the intersection between the study of business cycles and the determinants of the long run trajectories of per capita macroeconomic aggregates, and my thesis touches upon various attendant strands of economics, from the patent race models in industrial organisation that underlie the modern theory of endogenous growth to the role of imperfect asset markets in general equilibrium models that are the main working horses of contemporary macroeconomics. The first chapter of my thesis concerns a question which has been both unsatisfactorily answered and somewhat neglected by the discipline: the important issue of the relationship between higher frequency business cycle fluctuations and the determinant of long run growth. To tackle this question, I introduce a simple Schumpeterian quality ladder model into the structure of a real business cycle model and then propose two extensions to improve the model’s performance over the medium term so as to account for any lingering effects of fluctuations at lower frequencies. The simulated economy suggests that explicitly incorporating the growth generating mechanism does not significantly improve the way the model describes medium term dynamics and that modelling productivity growth as an exogenous process has very few costs in terms of the overall fit. Despite that, the model performs reasonably well in capturing the dynamics of research expenditure, and both extensions improve on the model’s fit in this particular regard. I then suggest that more realistic models incorporating rigidity in prices or financial frictions may carry substantially different implications but leave that question for future research. An important mechanism through which higher frequency fluctuations can affect long term growth is their effect on the volatility of research spending. Schumpeter offered the first coherent hypothesis for this relationship by suggesting that recessions offered a silver lining because firms would increase research expenditure in periods of lower economic activity because of a reduced opportunity cost of directing resources to inventive activity. This hypothesis has received a healthy degree of attention and while the evidence suggests that R&D spending behaves pro-cyclically rather than counter-cyclically, a few researchers have suggested that it is the presence of financing constraints that drives this pro-cyclical pattern. In 1

Pedro Serˆ odio Room 5B.146 Department of Economics University of Essex Wivenhoe Park, Colchester CO3 3LJ United Kingdom

their absence, the opportunity cost hypothesis would hold. To unify these competing claims regarding the cyclicality of research outlays, I look at disaggregated research expenditures in US firm data and test the hypothesis of R&D smoothing: the growth rate or deviation of R&D spending tracks the relevant measure of output but its share in the distribution of expenditures is negatively correlated with the measure of output. This is equivalent to having an elasticity of the logdifference of real research spending with respect to the log-difference of output that is lower than one. This reconciles seemingly mixed evidence on the cyclicality of research spending because most studies showing a counter-cyclical pattern use the ratio of R&D to the output measure, which captures the smoothing effect, rather than a genuine counter-cyclical response. The effect of both internal and external financing constraints is considered, with the estimates suggesting that the pro-cyclical behaviour of research activities cannot be attributed to their presence. In the final chapter, I extend the model discussed in the first chapter to include financial frictions and examine the relationship between the business cycle and research expenditure. The behaviour of R&D at various levels of disaggregation in the simulated economy replicates the empirical findings discussed in the second chapter, corroborating the view that firms smooth research spending and that this is reflected in aggregate data. The model also suggests that the source of the shocks is important in determining the cyclicality of this spending rubric; specifically, in the presence of shocks to labour productivity or financial conditions, the response of R&D is pro-cyclical, while shocks affecting households’ preference for leisure (which can be interpreted as a demand shock) engender counter-cyclical research spending. This suggests direction for future empirical work on whether recessions generate identical responses in firms’ optimal expenditure decisions regardless of source or whether they change according to the nature of these shocks.

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