Business cycles, R&D, and hysteresis: searching for asymmetries

According to endogenous growth theory, temporary changes in R&D spending affect the flow of new technologies only temporarily, but their cumulative effect permanently alters the stock of knowledge and thus the level of aggregate productivity. Because R&D is pro-cyclical, business cycles and long-run growth may be connected. If shocks and responses are symmetric, the effects cancel out; if they are asymmetric, business cycle volatility and long-term growth become interdependent. We test for such asymmetries in U.S. aggregate R&D using standard empirical techniques. The main findings are that: (i) R&D spending expansions are 40% longer than contractions, but differences in their rapidity are not statistically significant; (ii) the pro-cyclicality of R&D is stronger when unemployment is particularly low; (iii) the pro-cyclicality of R&D is stronger when financing opportunities are more abundant. Therefore, the results underscore the importance of economic booms for understanding R&D’s pro-cyclicality, especially in periods of tight labor markets and easy credit. Moreover, we point to promising avenues for theory to explain these findings.