Are recessions cleansing? Do they weed out outdated technologies so that firms emerge lean and mean? Do recessions have permanent effects on the level of productivity and output? Are more new products introduced during booms than during recessions? Are business cycle fluctuations bad for innovation and hence growth? This project helps answer these questions by examining the interaction between innovation and business cycles. The investigation involves both structural modeling and empirical research. More specifically, the model of process innovation developed emphasizes the learning curve dynamics of adopting a new production process. The model has a rich set of testable implications, and these will be confronted by U.S. data on manufacturing industries. The data are culled from a compendium of trade journal articles covering 1972 to the present. The focus is on the cyclicality of product innovation, and on whether most new goods are producer or consumer goods; durable or nondurable goods; complements or substitutes for existing goods. The model of product innovation is guided by the empirical evidence documented in the data set. The analysis is of research firms facing exogenous demand shocks. Implications of durability of the new products and substitutability between new and existing products are developed.
