Green Business Cycles

Abstract

This paper examines the relationship between green innovation and the business cycle, revealing that while non-green innovation is procyclical, green innovation is countercyclical. This pattern holds unconditionally over the business cycle and conditional on economic shocks. Motivated by these findings, we develop a business cycle model with endogenous green and non-green innovation to explain their cyclical behavior. The key mechanism operates through a “green is in the future” channel: green patents are expected to generate higher profits in the future, making patenting less sensitive to short-term economic downturns. In general equilibrium, this channel is reinforced, making green and non-green innovation effective substitutes. We provide direct evidence supporting the model mechanism using data on market-implied values of green and non-green patents. Joint paper with Diego Känzig, Maximilian Konradt, and Lixing Wang.