Inflation and Innovation in a Schumpeterian Economy with North–South Technology Transfer

Abstract

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

Innovation, FDI, and the long‐run effects of monetary policy

“… We assume that Northern entrepreneurs need to borrow from Northern consumers to finance investments in innovative R&D and to borrow from Southern consumers to finance adaptive R&D (FDI). A similar setting can also be found in Chu, Cozzi, and Furukawa ().…”

“…This paper differs from Chu, Cozzi, and Furukawa () in two ways. First, their model adopts the feature of semi‐endogenous growth, implying that the long‐run innovation rate is determined by exogenous parameters and is independent of monetary policy.…”

“…Aside from the policy of intellectual property rights protection, international production also makes monetary policy in one country exhibit cross‐country influences owing to the adjustment of the production pattern for firms in response to these policy changes. Chu, Cozzi, and Furukawa () develop a two‐country model to analyze how monetary policy affects innovation and technology transfer via FDI.…”

“… Chu, Cozzi, and Furukawa () find that a lower Northern (Southern) nominal monetary policy induces only a temporary increase in the rate of Northern innovation, leaving the long‐run rate of Northern innovation unchanged. They also show that a decrease in the Northern nominal interest rate generates an ambiguous effect on the rate of international technology transfer, but only provide a quantitative analysis of the production pattern.…”

Convergence, financial development, and policy analysis

“…Third, our paper is related to the literature on the relation between money and growth. Recent papers include Gomme (1991), Marquis and Reffett (1994), Chu and Cozzi (2014), Jones and Manuelli (1995), Miao and Xie (2013), and Chu et al (2017), among others. These papers typically introduce money via cash-in-advance constraints in infinite-horizon models, which do not feature poverty traps.…”