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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.

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Abstract

This study analyzes how inflation affects innovation and international technology transfer via cash-in-advance constraints on R&D. We consider a North-South quality-ladder model that features innovative Northern R&D and adaptive Southern R&D. We find that higher Southern inflation causes a permanent decrease in technology transfer, a permanent increase in the North-South wage gap, and a temporary decrease in the Northern innovation rate. Higher Northern inflation causes a temporary decrease in the Northern innovation rate, a permanent decrease in the North-South wage gap, and ambiguous effects on technology transfer. Finally, we calibrate the model to China-US data to perform a quantitative analysis.

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