Logo
Munich Personal RePEc Archive

Monetary Policy, R&D and Economic Growth in an Open Economy

Chu, Angus C. and Cozzi, Guido and Lai, Ching-Chong and Liao, Chih-Hsing (2013): Monetary Policy, R&D and Economic Growth in an Open Economy.

Warning
There is a more recent version of this item available.
[thumbnail of MPRA_paper_50433.pdf]
Preview
PDF
MPRA_paper_50433.pdf

Download (244kB) | Preview

Abstract

This study analyzes 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 and find that the cross-country welfare effects of monetary policy are quantitatively significant.

Available Versions of this Item

Atom RSS 1.0 RSS 2.0

Contact us: mpra@ub.uni-muenchen.de

This repository has been built using EPrints software.

MPRA is a RePEc service hosted by Logo of the University Library LMU Munich.