This paper develops an infinitely-lived representative agent economy, in which the relative contribution of the two engines of growth, investment and innovation, changes endogenously over time. The balanced growth path of the economy loses its stability when its endogenously determined growth rate is not sufficiently high, and the economy fluctuates, perpetually moving back and forth between two phases. In one phase, there is no innovation and the market structure is competitive, and the economy grows solely by capital accumulation, as in a neoclassical model. In the other phase, new goods are introduced and the market structure is monopolistic, as in a neo-Schumpetarian model. In the long run, both investment and innovation grow at the same rate, but the economy alternates between the periods of high investment and the periods of higher innovation.
Endogenous Growth Endogenous Fluctuations Asynchronous Movements of Innovation and Investment