Innovation and North-South Technology Transfer in a Cash-in-Advance Economy

Chu, Angus C. and Cozzi, Guido and Furukawa, Yuichi (2013): Innovation and North-South Technology Transfer in a Cash-in-Advance Economy.

Abstract

This study analyzes the cross-country effects of monetary policy 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 an increase in the Southern nominal interest rate 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. An increase in the Northern nominal interest rate 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 effects of the CIA constraints are quantitatively significant. Specifically, permanently decreasing the nominal interest rate to zero in China leads to a welfare gain of 3.37% in China and a welfare gain of 1.25% in the US. Permanently decreasing the nominal interest rate to zero in the US leads to welfare gains of 0.33% in the US and 1.24% in China.

• 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

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