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 a Schumpeterian growth model with endogenous entry of heterogeneous …rms to analyze the e¤ects 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 a¤ects the distribution of innovations that are implemented and would have an inverted-U e¤ect on economic growth if the entry cost is su¢ ciently large. We also calibrate the model to aggregate data of the US economy and …nd that the growth-maximizing in ‡ation rate is about 3%, which is consistent with recent empirical estimates.JEL classi…cation: O30, O40, E41

No abstract

This study develops a Schumpeterian growth model with heterogeneous households and heterogeneous …rms to explore the e¤ects of monetary policy on innovation and income inequality. Household heterogeneity arises from an unequal distribution of wealth. Firm heterogeneity arises from random quality improvements and a cost of entry. We …nd that under endogenous …rm entry, in ‡ation has inverted-U e¤ects on economic growth and income inequality. We also calibrate the model for a quantitative analysis and …nd that the model is able to match the growth-maximizing in ‡ation rate and the inequalitymaximizing in ‡ation rate that we estimate using crosscountry panel data.