Over the recent years 'opportunity cost' (OC) models of growth have argued that recessions are times when firms engage in productivity-improving activities because of intertemporal substitu- tion. This paper tests whether this approach is correct. The technique used to disentangle the trend from the cycle is semi-structural vector autoregression. The results are mildly supportive of the OC theory. There tends to be a negative impact of demand shocks on productivity, both in the short-run and in the long-run. And the short-run impact is stronger in those countries where fluctuations are more transitory. However, there is no significant response of R & D to demand shocks.
ASJC Scopus subject areas
- Economics and Econometrics