ABSTRACT
This chapter provides a New Keynesian dynamic stochastic general equilibrium (DSGE) model with endogenous innovation and examines the model parameters using Japanese economic data. It presents the relationship between interest rates and endogenous innovation is critically dependent on the assumptions used in the model. D. Anzoategui et al. provide an exception by incorporating endogenous innovation into the New Keynesian DSGE model and examines how endogenous innovation accounts for business cycles in the US. Regarding research and development (R&D) labor, the shock leads to more employment of R&D labor, facilitating endogenous innovation. Innovation policies should focus on productivity gains from technologies rather than productivity gains from future technologies. The chapter analyses the driving forces behind fluctuations by examining the variance decomposition of the main macroeconomic variables implied by the estimated model. Direct R&D subsidies to entrepreneurs facilitate endogenous innovation. The effects of the productivity shocks show a sharp contrast with respect to R&D labor.
