Growth, Cycles and Welfare: A Schumpeterian Perspective∗

We use a Schumpeterian model in which both the economy’s growth rate and its volatility are endogenously determined to assess some welfare and policy implications associated with business cycle ßuctuations. Because it features a higher average growth rate than its acyclical counterpart, steady— state welfare is higher along the cyclical equilibrium growth path of the model. We assess the impact of alternative stabilization policies designed to smooth cyclical ßuctuations. Although, it is possible to signiÞcantly reduce the variance of output growth via simple policy measures, the welfare beneÞts are at best negligible and at worst completely offset by the resulting reduction long—term productivity growth. ∗This is a modiÞed and extended version of the paper entitled “Schumpeterian Restructuring” presented at the CREIWorld Bank Conference on the Growth and Welfare Effects of Macroeconomic Volatility in Barcelona February 2006. We thank Thierry Tressel for a helpful discussion. 1