Chu, Angus C. and Cozzi, Guido and Lai, Ching-Chong and Liao, Chih-Hsing (2013): Inflation, R&D and Economic Growth in an Open Economy.
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Abstract
This study explores the long-run effects of monetary policy on economic growth and social welfare in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We find that an increase in the domestic nominal interest rate decreases 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, an increase in the foreign nominal interest rate also decreases economic growth in the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of only domestic households, the Nash-equilibrium nominal interest rates are generally higher than the optimal nominal interest rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. This difference is caused by a cross-country spillover effect of monetary policy arising from trade in intermediate goods. Under the CIA constraint on consumption (R&D investment), a larger market power of firms decreases (increases) the wedge between the Nash-equilibrium and optimal nominal interest rates. We also calibrate the two-country model to data in the Euro Area and the UK to quantify the welfare effects of decreasing the nominal interest rates from the Nash equilibrium to the optimal level.
Item Type: | MPRA Paper |
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Original Title: | Inflation, R&D and Economic Growth in an Open Economy |
Language: | English |
Keywords: | monetary policy, economic growth, R&D, trade in intermediate goods. |
Subjects: | E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money 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 > O30 - General O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General |
Item ID: | 53215 |
Depositing User: | Prof. Angus C. Chu |
Date Deposited: | 26 Jan 2014 22:21 |
Last Modified: | 30 Sep 2019 00:56 |
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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/53215 |
Available Versions of this Item
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Monetary Policy, R&D and Economic Growth in an Open Economy. (deposited 04 Jun 2013 13:31)
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Monetary Policy, R&D and Economic Growth in an Open Economy. (deposited 06 Oct 2013 12:23)
- Inflation, R&D and Economic Growth in an Open Economy. (deposited 26 Jan 2014 22:21) [Currently Displayed]
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Monetary Policy, R&D and Economic Growth in an Open Economy. (deposited 06 Oct 2013 12:23)