A European Central Bank Fellowship for Prof. Malamud
© 2016 European Central Bank
Prof. Semyon Malamud, from the SFI@EPFL, received a Lamfalussy Fellowship from the European Central Bank aimed at promising young economists in academia, central banks and research institutions. The Lamfalussy Fellows program aims to promote high-quality, policy-relevant research on the structure, integration and performance of the European financial system and links with other financial systems.
Within the framework of this ECB program, Semyon Malamud has written a paper co-authored with Francesca Zucchi (a former EPFL PhD student, currently at the reserve Board), entitled "Liquidity, Innovation, and Endogenous Growth”.
In this paper, Malamud and Zucchi develop a Schumpeterian model of endogenous growth that emphasizes the importance of innovations and creative destruction for economic growth. Importantly, incumbent entrepreneurs face the risk of creative destruction by new entrants: young, innovative firms that may create a new product or a product of a higher quality that may take away the market share of incumbent firms and force their exit. Thus, on the one hand, a high rate of creative destruction is beneficial for the economy because it leads to faster quality improvement and hence to stronger economic growth; on the other hand, it discourages innovation by incumbents because the expected rents that the incumbents will be able to extract from innovating decrease in the rate of creative destruction. An application of this model to economic policy would suggest that innovation subsidies for small and young firms might need to be balanced by subsidies for large incumbent firms.