Munich Personal RePEc Archive

Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors

Huang, Chien-Yu and Yang, Yibai and Zheng, Zhijie (2018): Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors.

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Abstract

This study investigates the effects of monetary policy on economic growth and social welfare in a Schumpeterian economy with an upstream and a downstream sector in which the R&D investment of these sectors is subject to a cash-in-advance (CIA) constraint. We show that a higher nominal interest rate reallocates labor from a more cash-constrained R&D sector to a less one, which could generate an inverted-U effect on economic growth. In addition, we examine the necessary and sufficient conditions for the (sub)optimality of the Friedman rule by relating the underinvestment and overinvestment of R&D in the decentralized economy, and find that this relationship is crucially determined by the presence of CIA constraints, the relative productivity between upstream R&D and downstream R&D, and the strength of markup.

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