Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles

This paper studies an agent-based model that bridges Keynesian theories of demand-generation and Schumpeterian theories of technology-fueled economic growth. We employ the model to investigate the properties of macroeconomic dynamics and the impact of public polices on supply, demand and the fundamentals of the economy. We find profound complementarities between factors influencing aggregate demand and drivers of technological change that affect both short-run fluctuations and long-term growth patterns. From a normative point of view, simulations show a corresponding complementarity between Keynesian and Schumpeterian policies in sustaining long-run growth paths characterized by milder fluctuations and relatively lower unemployment levels. The matching or mismatching between innovative exploration of new technologies and the conditions of demand generation appear to suggest the presence of two distinct regimes of growth (or absence thereof) characterized by different short-run fluctuations and unemployment levels. (C) 2010 Elsevier B.V. All rights reserved.