Medium Frequencies in Non-Frontier Economies

Most countries in the world are not at the technological frontier, yet their economies grow and fluctuate. In this paper we set up a model of endogenous growth with business cycle fluctuations usable to analyze the medium frequency fluctuations in non-frontier countries. The growth mechanism is a Schumpeterian creative destruction framework, which is embedded into a real business cycle dynamic stochastic general equilibrium model, with standard and non-standard features. We allow for multinational firms entering the economy and challenging existing incumbents, and study the tension between their direct positive productivity contribution and their indirect negative contribution through the expected obsolescence of domestic innovators. We calibrate the model and show, via simulations, the potential value added from our prototype model.