Inflation, R&D and growth in an open economy

Abstract

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

Human Capital and Innovation in a Monetary Schumpeterian Growth Model

“…Here we consider patent breadth similar to Li (2001) and Iwaisako and Futagami (2013) by assuming that the markup 2 (1; z] is a policy instrument determined by the patent authority. 8 This formulation provides as a simple way to separate the markup from the step size z. The amount of monopolistic pro…t in industry j is…”

“…The novelty of our analysis is that we allow for endogenous human capital accumulation and show that the interaction between endogenous technological progress and human capital accumulation gives rise to important implications on the e¤ects of monetary policy. Following previous studies, such as Chu and Cozzi (2014) and Chu et al (2015), we model money demand via a cash-in-advance (CIA) constraint on R&D investment. 1 In this growth-theoretic framework, we …nd that an increase in the nominal interest rate leads to a decrease in R&D and human capital investment, which in turn reduces the long-run growth rates of technology and output.…”

“…The seminal study in this literature on in ‡ation and innovation-driven growth is Marquis and Re¤ett (1994), who analyze the e¤ects of a CIA constraint on consumption in the Romer variety-expanding model. In contrast, we consider a Schumpeterian quality-ladder model and explore the e¤ects of monetary policy via a CIA constraint on R&D investment as in Chu and Cozzi (2014), Chu et al (2015), Chen (2015) and Huang et al (2015). 2 However, this study di¤ers from previous studies by allowing for human capital accumulation.…”

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

“…To incorporate money demand into this growth-theoretic framework, we impose a cash-in-advance (CIA) constraint on R&D investment. Berentsen et al (2012), Chu and Cozzi (2014) and Chu et al (2015) provide extensive discussion on evidence for the presence of cash requirements on R&D expenditures. 1 We capture these cash requirements using a CIA constraint on R&D.…”

“…In this literature, Marquis and Re¤ett (1994) is the seminal study that analyzes the e¤ects of in ‡ation on innovation in the Romer variety-expanding growth model. In contrast, we analyze the e¤ects of in ‡ation in a Schumpeterian quality-ladder model as in Chu and Lai (2013), Chu and Cozzi (2014), Chu et al (2015) and He and Zou (2016), whose models however feature an identical step size of quality improvements across …rms. Subsequent studies, such as Chu and Ji (2016) and Huang et al (2015), consider monetary policy in a Schumpeterian growth model with both variety expansion and (identical) quality accumulation across …rms.…”