Chu, Angus C. and Cozzi, Guido (2012): R&D and economic growth in a cash-in-advance economy.
Download (182kB) | Preview
R&D investment has well-known liquidity problems, with potentially important consequences. In this paper, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian model with cash-in-advance (CIA) constraints on consumption, R&D investment, and manufacturing. Our results are as follows. Under the CIA constraints on consumption and R&D (manufacturing), an increase in the nominal interest rate would decrease (increase) R&D and economic growth. So long as the effect of cash requirements in R&D is relatively more important than in manufacturing, the nominal interest rate would have an overall negative effect on R&D and economic growth as documented in recent empirical studies. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model. Specifically, we find that the suboptimality or optimality of Friedman rule is closely related to a seemingly unrelated issue that is the overinvestment versus underinvestment of R&D in the market economy, and this result is robust to alternative versions of the Schumpeterian model.
|Item Type:||MPRA Paper|
|Original Title:||R&D and economic growth in a cash-in-advance economy|
|Keywords:||economic growth, R&D, quality ladders, cash-in-advance, monetary policy, Friedman rule|
|Subjects:||O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O30 - General
O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money
|Depositing User:||Angus C. Chu|
|Date Deposited:||02. Jul 2012 20:03|
|Last Modified:||13. Feb 2013 03:09|
Abel, A., 1985. Dynamic behavior of capital accumulation in a cash-in-advance model, Journal of Monetary Economics, 16, 55-71.
Aghion, P., Farhi, E., and Kharroubi, E., 2012. Monetary Policy, Liquidity, and Growth, NBER Working Paper No. 18072.
Aghion, P., and Howitt, P., 1992. A Model of Growth through Creative Destruction, Econometrica, 60, 323-351.
Bhattacharya, J., Haslag, J., and Russell, S., 2005. The role of money in two alternative models: When is the Friedman rule optimal and why?. Journal of Monetary Economics, 52, 1401-1433.
Brown, J., and Petersen, B., 2009. Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments. Journal of Banking & Finance, 33, 971-984.
Chu, A., and Lai, C., 2012. Money and the welfare cost of inflation in an R&D growth model. Journal of Money, Credit and Banking, forthcoming.
Chu, A., Lai, C., and Liao, C., 2012. A Tale of Two Growth Engines: Interactive Effects of Monetary Policy and Intellectual Property Rights, manuscript.
Comin, D., 2004. R&D: A small contribution to productivity growth. Journal of Economic Growth, 9, 391-421.
Cozzi, G., 2007. The Arrow effect under competitive R&D. The B.E. Journal of Macroeconomics (Contributions), 7, Article 2.
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.
Dotsey, M., and Ireland, P., 1996. The welfare cost of inflation in general equilibrium. Journal of Monetary Economics, 37, 29-47.
Evers, M., Niemann, S., and Schiffbauer, M., 2007. Inflation, investment composition and total factor productivity. University of Essex, Economics Discussion Papers No. 632.
Feenstra, R., 1985. Anticipated devaluations, currency flight, and direct trade controls in a monetary economy. American Economic Review, 75, 386-401.
Friedman, M., 1969. The Optimum Quantity of Money. Macmillan.
Gahvari, F., 2007. The Friedman rule: old and new. Journal of Monetary Economics, 54, 581-589.
Gahvari, F., 2012. Friedman rule in a model with endogenous growth and cash-in-advance constraint. Journal of Money, Credit, and Banking, forthcoming.
Goh, A.-T., and Olivier, J., 2002. Optimal patent protection in a two-sector economy. International Economic Review, 43, 1191--1214.
Grossman, G., and Helpman, E., 1991. Quality ladders in the theory of growth. Review of Economic Studies, 58, 43-61.
Hall, B., and Kortum, J., 2010. The Financing of R&D and Innovation, in (Hall, B. and N. Rosenberg, eds) Handbook of the Economics of Innovation. Elsevier-North Holland.
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.
Lai, C., and Chin, C., 2010. (In)determinacy, increasing returns, and the optimality of the Friedman rule in an endogenously growing open economy. Economic Theory, 44, 69-100.
Laincz, C., and Peretto, P., 2006. Scale effects in endogenous growth theory: An error of aggregation not specification. Journal of Economic Growth, 11, 263-288.
Li, C.-W., 2001. On the policy implications of endogenous technological progress. Economic Journal, 111, C164-C179.
Marquis, M., and Reffett, K., 1994. New technology spillovers into the payment system. Economic Journal, 104, 1123-1138.
Mulligan, C., and Sala-i-Martin, X., 1997. The optimum quantity of money: Theory and evidence. Journal of Money, Credit, and Banking, 29, 687-715.
Peretto, P., 1998. Technological change and population growth. Journal of Economic Growth, 3, 283-311.
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.
Tobin, J., 1965. Money and economic growth. Econometrica, 33, 671-684.
Wang, P., and Yip, C., 1992. Alternative approaches to money and growth. Journal of Money, Credit and Banking, 24, 553-562.
Available Versions of this Item
- R&D and economic growth in a cash-in-advance economy. (deposited 02. Jul 2012 20:03) [Currently Displayed]