This paper proposes a microfounded model featuring frictional labor markets that generates procyclical R&D expenditures as a result of optimizing behavior by heterogeneous monopolistically competitive firms. This allows to show that business cycle fluctuations affect the aggregate endogenous growth rate of the economy. Consequently, transitory shocks leave lasting level effects. This mechanism is responsible for economically significant hysteresis effects that significantly increase the welfare cost of business cycles relative to the exogenous growth model. I show that this has serious policy implications and creates ample space for policy intervention. I find that several static and countercyclical subsidy schemes are welfare improving. Importantly, I find that due to labor market frictions subsidizing incumbent firms generates large and positive welfare effects.

In a national economy, are individual subnational regions business cycle takers or setters? We address this important regional policy question by investigating regional business cycles at NUTS-3 granularity in Poland (N = 73), using two metrics in parallel: GDP dynamics and unemployment. To extract the business cycle, we use a spatial Markov switching model that features both idiosyncratic business cycle fluctuations across regions (as a 2-state chain), as well as spatial interactions with other regions (as spatial autoregression). The posterior distribution of the parameters is simulated with a Metropolis-withinGibbs procedure. We find a clear division into business cycle setters and takers, the latter being largely (but not only) non-metropolitan regions.