A Tale of Two Growth Engines: Interactive Effects of Monetary Policy and Intellectual Property Rights

Abstract

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.

On the nonlinear relationship between inflation and growth: A theoretical exposition

“…Huang et al (2013) also introduce CIA constraints into the quality ladder model of growth, while Oikawa and Ueda (2015) explore the optimal rate of in ation in a similar setting. On the contrary, Chu et al (2012) and He (2015) introduce money into variety expansion models 4 For an estimation of the threshold rate of in ation, see also Eggoh and Khan (2014), Pollin and Zhu (2006), and Rousseau and Wachtel (2002). 5 For example, by using two-sector endogenous growth models with physical and human capital, Gomme (1993), Jones and Manuelli (1995), and Mino (1997) show that in ation has a negative impact on the balanced growth rate of the economy.…”

“…In addition, a fraction [0, 1] of the variable cost and a fraction [0, 1] of the xed cost must be nanced by money. 9 The CIA constraint is given by…”

Effects of Patent Protection on Optimal Corporate Income and Consumption Taxes in an R&D‐Based Growth Model

“… Chu, Lai, and Liao () examined how the effects of monetary policy (expansion of the money supply) depend on patent protection in a simple variety‐expansion‐type R&D‐based growth model. Their analysis is similar to ours in the sense that we both examine how the effects of policies depend on the strength of patent protection.…”

Inflation and Growth: A Non-Monotonic Relationship in an Innovation-Driven Economy

“…As for the degree of various types of CIA constraints {ξ c , ξ v , ξ h }, the degree of the CIA constraint on consumption ξ c is set to 0.29, which lies in a reasonable range of M1-consumption ratios (see, for example, Dotsey and Sarte (2000) and Chu et al (2010)). We focus on the case where ξ h > ξ v to capture the empirical findings that firms which tend to engage in radical innovation are more constrained by cash/money than their old and large counterparts that conduct incremental innovation (e.g., Akcigit (2009) and Caggese (2015)).…”