Working Papers

Business Cycle, R&D, and Hysteresis: Searching for Asymmetries with Hedieh Shadmani, R&R at Applied Economics [Updated: February 2026]
In endogenous growth models where the research and development (R&D) level determines the growth rate of productivity, temporary changes in R&D cause permanent level effects, i.e. hysteresis. When positive and negative shocks move R&D symmetrically, an equally sized positive and negative shock produce R&D booms and busts that generate equal and opposite permanent level effects, so their long-run impacts cancel out. Asymmetries break this offsetting, allowing temporary shocks to influence long-run growth. Because private R&D is well known to be pro-cyclical, understanding whether these asymmetries exist is a necessary first step toward assessing how short-run fluctuations in R&D might translate into long-run growth effects. This paper tests for asymmetries in U.S. aggregate private R&D by applying a McKay-Reis duration and steepness analysis to characterize expansions and contractions in R&D, and endogenous threshold regressions to examine state-dependent pro-cyclicality. The main findings are duration asymmetries — longer expansions, although with low statistical significance —, and dependence on labor-market and financial conditions: R&D’s pro-cyclicality intensifies when unemployment is low or credit is abundant. These patterns highlight the importance of boom periods in shaping R&D dynamics and point to channels through which business cycle shocks could generate growth effects.