Virtues of bad times: Interaction between productivity growth and economic fluctuations

We develop a model of optimal productivity growth under demand fluctuations. We consider two alternative hypotheses. First, we assume that productivity growth is costly in terms of current production. Second, we assume that the cost of productivity improvements is independent of current production. It is shown that, in the first case, productivity improvements will be countercyclical whereas, in the second case, they will be procyclical. The model then is used to study the impact of the frequency and amplitude of fluctuations on long-run growth. The results corresponding to the first hypothesis are shown to be consistent with recent empirical work.