Business Cycles and the Dynamics of Innovation: a Theoretical Perspective

This paper constructs a simple dynamic growth model and deducts four theoretical predictions: prediction I , new knowledge creations and research and development expenditures (R&DE) contribute to economic upturns and downturns; prediction II , the R&DE and new knowledge creations upsurge and fall in the economic expansions and contractions periods, respectively; prediction III , the research intensity and frequency of new knowledge creations increase and reduce during boom and recession periods, respectively; prediction IV , positive and negative shocks in R&DE and new knowledge creation are caused by changes in consumption, saving, R&DE, and innovation activities during economic boom and slump periods; and prediction IV , innovation and gross domestic product have a bidirectional causal nexus during trade cycles.