Endogenous recessions: The creative destruction effect of final product novelty

In this paper we build a basic macroeconomic model aimed to grasp some aspects of the inner functioning of macroeconomic fluctuations. We highlight a mechanism through which the appearance of a product innovation results in an eventual reduction of the aggregate economic activity. When a new product appears, demand moves towards this more attractive product. The ‘creative destruction’ effect in this context is represented by the resources lost when firms producing old varieties exit the market due to the shortage of demand. Because firms producing a given product receive on average the same amount of demand, exits happen to be highly synchronized. We use this fact to explain the fluctuation asymmetries observed in real data. We test the ability of the model to meet features of real data against the United States' GDP in the 1950–1992 period.