We develop a perfectly competitive endogenous growth model in which
R&D is the engine of growth. Our model generates pro-cyclical R&D
investment and labor input as a pareto optimal response to technology
shocks to the consumption and equipment good sectors. The model also
reproduces a variety of facts from the U.S. economy. Growth in R&D
capital accounts for 75 percent of the growth rate of GNP and the decline
in the relative price of equipment investment. Investment in each sector
is pro-cyclical. Our results suggest that equipment shocks may be less
important than the previous literature has found. After accounting for
the endogenous response of R&D, equipment sector shocks only account
for a small fraction of the variance in the growth rate of GNP.
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