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

Chu, Angus C. and Cozzi, Guido and Furukawa, Yuichi and Liao, Chih-Hsing (2013): Inflation and Innovation in a Schumpeterian Economy with North-South Technology Transfer.

Abstract

This study analyzes the cross-country effects of inflation 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 find that a higher inflation 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 inflation 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 effect 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 find that the cross-country welfare effect of inflation is quantitatively significant from the North to the South, but not from the South to the North. Specifically, permanently decreasing inflation 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 inflation to achieve the Friedman rule in China leads to much smaller welfare gains of 0.34% in China and 0.17% in the US.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy, economic growth, R&D, North-South product cycles, FDI
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights

References

Abel, A., 1985. Dynamic behavior of capital accumulation in a cash-in-advance model. Journal of Monetary Economics, 16, 55-71.

Acemoglu, D., and Akcigit, U., 2012. Intellectual property rights policy, competition and innovation. Journal of the European Economic Association, 10, 1-42.

Bates, T., Kahle, K., and Stulz, R., 2009. Why do U.S. firms hold so much more cash than they used to?. Journal of Finance, 64, 1985--2021.

Berentsen, A., Breu, M., and Shi, S., 2012. Liquidity, innovation, and growth. Journal of Monetary Economics, 59, 721-737.

Bernstein, J., and Nadiri, M. I., 1988. Interindustry R&D spillovers, rates of return, and production in high-tech industries. American Economic Review, 78, 429-434.

Bernstein, J., and Nadiri, M. I., 1989. Research and development and intra-industry spillovers: An empirical application of dynamic duality. Review of Economic Studies, 56, 249-267.

Boston Consulting Group, 2011. Transportation goods, electrical equipment, and furniture are among sectors most likely to gain jobs as US manufacturing returns. Boston Consulting Group's Press Releases, 7 October 2011.

Broda, C., and Weinstein, D., 2006. Globalization and the gains from variety. Quarterly Journal of Economics, 121, 541-585.

Brown, J., and Petersen, B., 2011. Cash holdings and R&D smoothing. Journal of Corporate Finance, 17, 694-709.

Chu, A., and Cozzi, G., 2014. R&D and economic growth in a cash-in-advance economy. International Economic Review, 55, 507-524.

Chu, A., Cozzi, G., Lai, C., and Liao, C., 2015. Inflation, R&D and economic growth in an open economy. Journal of International Economics, 96, 360-374.

Chu, A., and Ji, L., 2016. Monetary policy and endogenous market structure in a Schumpeterian economy. Macroeconomic Dynamics, 20, 1127-1145.

Chu, A., and Lai, C., 2013. Money and the welfare cost of inflation in an R&D growth model. Journal of Money, Credit and Banking, 45, 233-249.

Chu, A., Lai, C., and Liao, C., 2012. A tale of two growth engines: Interactive effects of monetary policy and intellectual property rights. MPRA Paper No. 40372.

Comin, D., 2004. R&D: A small contribution to productivity growth. Journal of Economic Growth, 9, 391-421.

Cozzi, G., 2007a. The Arrow effect under competitive R&D. B.E. Journal of Macroeconomics (Contributions), 7, Article 2.

Cozzi, G., 2007b. Self-fulfilling prophecies in the quality ladders economy. Journal of Development Economics, 84, 445-464.

Cozzi, G., Giordani, P., and Zamparelli, L., 2007. The refoundation of the symmetric equilibrium in Schumpeterian growth models. Journal of Economic Theory, 136, 788-797.

Dinopoulos, E., and Segerstrom, P., 2010. Intellectual property rights, multinational firms and economic growth. Journal of Development Economics, 92, 13-27.

Falato, A., and Sim, J., 2014. Why do innovative firms hold so much cash? Evidence from changes in state R&D tax credits. FEDS Working Paper No. 2014-72.

Grossman, G., and Helpman, E., 1991. Innovation and Growth in the Global Economy. The MIT Press.

Hall, B., 1992. Investment and R&D at the firm level: Does the source of financing matter?. NBER Working Paper No. 4096.

Huang, C., Chang, J., and Ji, L., 2015. Inflation, market structure, and innovation-driven growth with various cash constraints. Manuscript.

Iwaisako, T., Tanaka, H., and Futagami, K., 2011. A welfare analysis of global patent protection in a model with endogenous innovation and foreign direct investment. European Economic Review, 55, 1137-1151.

Jaffe, A., 1986. Technological opportunity and spillovers of R&D: Evidence from firms' patents, profits, and market value. American Economic Review, 76, 984-1001.

Jones, C., 1999. Growth: With or without scale effects. American Economic Review, 89, 139-144.

Jones, C., and Williams, J., 2000. Too much of a good thing? The economics of investment in R&D. Journal of Economic Growth, 5, 65-85.

Li, C., 2003. Endogenous growth without scale effects: A comment. American Economic Review, 93, 1009-1018.

Los, B., and Verspagen, B., 2000. R&D spillovers and productivity: Evidence from U.S. manufacturing microdata. Empirical Economics, 25, 127-148.

Marquis, M., and Reffett, K., 1994. New technology spillovers into the payment system. Economic Journal, 104, 1123-1138.

Opler, T., Pinkowitz, L., Stulz, R., and Williamson, R., 1999. The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52, 3-46.

Romer, P., 1990. Endogenous technological change. Journal of Political Economy, 98, S71-S102.

Segerstrom, P., 1998. Endogenous growth without scale effects. American Economic Review, 88, 1290-1310.

Stockman, A., 1981. Anticipated inflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics, 8, 387-93.

Tanaka, H., and Iwaisako, T., 2014. Intellectual property rights and foreign direct investment: A welfare analysis. European Economic Review, 67, 107-124.

Venturini, F., 2012. Looking into the black box of Schumpeterian growth theories: An empirical assessment of R&D races. European Economic Review, 56, 1530-1545.