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
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.
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