Product vs. process innovations and economic fluctuations

The effects of product and process innovations on economic fluctuations are studied in this paper. The main features of the model are endogenous product innovations and lower-bound consumption constraints on each variety. Results show that in cases when productivity is low compared to the number of available varieties, process innovations increase economic activity, whereas, the effects of product innovations are not significant. However, if the number of different varieties of goods available is low compared to productivity and the lower-bound consumption constraints bind, process innovations might be contractionary.