Product Innovation, Stock Price, and Business Cycle

This paper studies the interaction between product innovation, stock price, and aggregate output. I propose an endogenous variety business cycle model in which existing \u85rms expertise is essential for innovation of new products. In the model, the \u85rm value reects not only the product the rm is manufacturing today but also the \u85rms ability to introduce new products in the future. I study how the model responds to various shocks, with special attention to the lead and lag structure between the stock price and output. The stock price leads GDP, which is a well known empirical regularity that most standard models have di ¢ culty generating.