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
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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