R&D investment has well-known liquidity problems, with potentially important consequences.In this paper, we analyze the e¤ects of monetary policy on economic growth and social welfare in a Schumpeterian model with cash-in-advance (CIA) constraints on consumption, R&D investment, and manufacturing. Our results are as follows. Under the CIA constraints on consumption and R&D (manufacturing), an increase in the nominal interest rate would decrease (increase) R&D and economic growth. So long as the e¤ect of cash requirements in R&D is relatively more important than in manufacturing, the nominal interest rate would have an overall negative e¤ect on R&D and economic growth as documented in recent empirical studies. We also analyze the optimality of Friedman rule and …nd that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model. Speci…cally, we …nd that the suboptimality or optimality of Friedman rule is closely related to a seemingly unrelated issue that is the overinvestment versus underinvestment of R&D in the market economy, and this result is robust to alternative versions of the Schumpeterian model. JEL classi…cation: O30, O40, E41

This study explores the long-run e¤ects of in ‡ation in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We …nd that increasing domestic in ‡ation reduces 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, increasing foreign in ‡ation also a¤ects the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of domestic households, the Nash-equilibrium in ‡ation rates are generally higher than the optimal in ‡ation rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. Under the CIA constraint on R&D (consumption), a larger market power of …rms ampli…es (mitigates) this in ‡ationary bias. We use cross-country panel data to estimate the e¤ects of in ‡a-tion on R&D and also calibrate the two-country model to data in the Euro Area and the US to quantify the welfare e¤ects of decreasing the in ‡ation rates from the Nash equilibrium to the optimal level.JEL classi…cation: O30, O40, E41, F43

This study develops an R&D-based growth model that features both vertical and horizontal innovation to shed some light on the current debate on whether patent protection stimulates or sti ‡es innovation. Speci…cally, we analyze the growth and welfare e¤ects of patent protection in the form of pro…t division between sequential innovators along the quality ladder. We show that patent protection has asymmetric e¤ects on vertical innovation (i.e., quality improvement) and horizontal innovation (i.e., variety expansion). Maximizing the incentives for vertical (horizontal) innovation requires a pro…t-division rule that assigns the entire ‡ow pro…t to the entrant (incumbent) of a quality ladder. In light of this …nding, we argue that in order to properly analyze the growth and welfare implications of patent protection, it is important to disentangle its di¤erent e¤ects on vertical and horizontal innovation.JEL classi…cation: O31, O34, O40