Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms

Chu, Angus C. and Cozzi, Guido and Furukawa, Yuichi and Liao, Chih-Hsing (2017): Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms.

Abstract

This study develops a Schumpeterian growth model with endogenous entry of heterogeneous firms to analyze the effects of monetary policy on economic growth via a cash-in-advance constraint on R&D investment. Our results can be summarized as follows. In the special case of a zero entry cost, an increase in the nominal interest rate decreases R&D, the arrival rate of innovations and economic growth as in previous studies. However, in the general case of a positive entry cost, an increase in the nominal interest rate affects the distribution of innovations that are implemented and would have an inverted-U effect on economic growth if the entry cost is sufficiently large. We also calibrate the model to aggregate data of the US economy and find that the growth-maximizing inflation rate is about 3%, which is consistent with recent empirical estimates. Finally, we also explore the welfare effects of inflation and consider a number of extensions to the benchmark model.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy, inflation, economic growth, heterogeneous firms
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity

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