This study explores the long-run e¤ects of in ‡ation in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We …nd that increasing domestic in ‡ation reduces domestic R&D investment and the growth rate of domestic technology. Given that economic growth in a country depends on both domestic and foreign technologies, increasing foreign in ‡ation also a¤ects the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of domestic households, the Nash-equilibrium in ‡ation rates are generally higher than the optimal in ‡ation rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. Under the CIA constraint on R&D (consumption), a larger market power of …rms ampli…es (mitigates) this in ‡ationary bias. We use cross-country panel data to estimate the e¤ects of in ‡a-tion on R&D and also calibrate the two-country model to data in the Euro Area and the US to quantify the welfare e¤ects of decreasing the in ‡ation rates from the Nash equilibrium to the optimal level.JEL classi…cation: O30, O40, E41, F43

This study develops a Schumpeterian growth model with endogenous entry of heterogeneous …rms to analyze the e¤ects of monetary policy on economic growth via a cash-in-advance constraint on R&D investment. Our results can be summarized as follows. In the special case of a zero entry cost, an increase in the nominal interest rate decreases R&D, the arrival rate of innovations and economic growth as in previous studies. However, in the general case of a positive entry cost, an increase in the nominal interest rate a¤ects the distribution of innovations that are implemented and would have an inverted-U e¤ect on economic growth if the entry cost is su¢ ciently large. We also calibrate the model to aggregate data of the US economy and …nd that the growth-maximizing in ‡ation rate is about 3%, which is consistent with recent empirical estimates.JEL classi…cation: O30, O40, E41

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This study develops a Schumpeterian growth model with heterogeneous households and heterogeneous …rms to explore the e¤ects of monetary policy on innovation and income inequality. Household heterogeneity arises from an unequal distribution of wealth. Firm heterogeneity arises from random quality improvements and a cost of entry. We …nd that under endogenous …rm entry, in ‡ation has inverted-U e¤ects on economic growth and income inequality. We also calibrate the model for a quantitative analysis and …nd that the model is able to match the growth-maximizing in ‡ation rate and the inequalitymaximizing in ‡ation rate that we estimate using crosscountry panel data.

This study analyzes the cross-country e¤ects of in ‡ation on innovation and international technology transfer via cash-in-advance (CIA) constraints on R&D investment. We consider a scale-invariant North-South quality-ladder model that features innovative R&D in the North and adaptive R&D in the South. We …nd that a higher in ‡ation in the South causes a permanent decrease in the rate of international technology transfer, a permanent increase in the North-South wage gap, and a temporary decrease in the rate of Northern innovation. A higher in ‡ation in the North causes a temporary decrease in the rate of Northern innovation, a permanent decrease in the North-South wage gap, and an ambiguous e¤ect on the rate of international technology transfer depending on the relative size of the two economies. We also calibrate the model to China-US data and …nd that the cross-country welfare e¤ect of in ‡ation is quantitatively signi…cant from the North to the South, but not from the South to the North. Speci…cally, permanently decreasing in ‡ation to achieve the Friedman rule in the US leads to a welfare gain of 3.28% in the US and a welfare gain of 3.31% in China. However, permanently decreasing in ‡ation to achieve the Friedman rule in China leads to much smaller welfare gains of 0.34% in China and 0.17% in the US.JEL classi…cation: O30, O40, E41, F43

How do intellectual property rights that determine the market power of firms influence the growth and welfare effects of monetary policy? To analyze this question, we develop a monetary hybrid endogenous growth model in which R&D and capital accumulation are both engines of long‐run economic growth. We find that monetary expansion hurts economic growth and social welfare by reducing R&D and capital accumulation. Furthermore, a larger market power of firms strengthens these growth and welfare effects of monetary policy through the R&D channel but weakens these effects through the capital‐accumulation channel. Therefore, whether the market power of firms amplifies or mitigates the welfare cost of inflation depends on the relative importance of the two growth engines. Finally, we calibrate the model using data in the United States and the Euro Area to quantitatively evaluate and compare the welfare cost of inflation in these two economies and find that the R&D channel dominates in both economies.

In this study, we develop a search-and-matching monetary growth model to analyze the e¤ects of in ‡ation on economic growth and social welfare by introducing endogenous economic growth via capital externality into a two-sector search-and-matching model. We …nd that the channel through which in ‡ation a¤ects economic growth in the search-and-matching model is di¤erent from the traditional cash-in-advance model. To facilitate the calibration, we obtain an empirical estimate of the e¤ects of in ‡ation on economic growth using panel regressions. In the simulation analysis, we quantitatively evaluate the welfare e¤ect of in ‡ation in the search-and-matching endogenous growth model and compare it to a search-and-matching exogenous growth model. We …nd that the welfare e¤ect of in ‡ation is nonlinear in the endogenous growth model whereas it is linear in the exogenous growth model. Furthermore, we …nd that the welfare cost of in ‡ation under endogenous growth is up to four times as large as the welfare cost of in ‡ation under exogenous growth.JEL classi…cation: E41, O41, O42.

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