Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms

Abstract

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

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

“…In particular, in a more empirically supportive case where horizontal R&D suffers a greater diminishing returns than vertical R&D, our model can generate an inverted-U relationship between inflation and growth when a sufficiently larger extent of a CIA constraint on horizontal R&D than on vertical R&D is met. This result holds in our general model setting with elastic labor supply and without a scale effect, which differs from Chu et al (2017). Moreover, our model is calibrated by applying aggregate data for the US economy.…”

“…Wang and Xie (2013), however, find evidence of a non-monotonic relationship between inflation and growth (i.e., a growth-maximizing inflation rate) based on a neoclassical model that features labor friction. One notable exception is Chu et al (2017), who also find evidence of an inverted-U relationship between inflation and growth in a canonical Schumpeterian growth model featuring random quality improvements. Our results complement their work in several respects.…”

“…First, their framework only considers vertical innovation, whereas our model considers vertical innovation in addition to horizontal innovation, and these two types of innovation are shown to play very different roles in explaining the impact of monetary policy on economic growth. Second, the model in Chu et al (2017) removes scale effects by normalizing the size of the population, whereas our model is made to be scale invariant by taking into account the product proliferation. Furthermore, when the model setting is generalized to allow for elastic labor supply, the result of an inverted-U relationship between inflation and growth does not hold in Chu et al (2017), whereas our model is still robust to produce this relationship between inflation and growth.…”

Innovation and inequality in a monetary Schumpeterian model with heterogeneous households and firms

“…The inverted-U e¤ect of in ‡ation on economic growth under endogenous entry of heterogeneous …rms is the same as in Chu et al (2017). They showed that in ‡ation increases the cost of R&D via the cash-in-advance (CIA) constraint on R&D and decreases the arrival rate of innovation, which is a negative e¤ect of in ‡ation on economic growth.…”

Introduction to the Macroeconomic Dynamics Special Issue On: Growth in the Aftermath of the Financial Crisis: Theories, Policies, and Sources of Sustainable Development

“…In most of growth literature, the intensity of spillovers is assumed to be uniform across technologies [even if dependent on the existing number of technologies, as in Peretto and Connolly (2007), and Acemoglu et al (2012), among others]. Recent exceptions are represented by Acemoglu and Cao (2015) and Chu et al (2017) where firms' heterogeneity is allowed for, but this is not attributed to the structure of R&D spillovers as a whole. At the same time, there is increasing evidence that growth rates of modern economies may be non-monotonic, or even declining [see, e.g., Storper (2011), Fernald andJones (2014), and Gordon (2016)].…”