R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY

Abstract

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

Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms

“…In this case,~ = 1, and g = 1 is monotonically decreasing in i via . This result is the same as in Chu and Cozzi (2014), who consider a Schumpeterian growth model with an identical step size of quality improvements across …rms. However, when the entry cost t is positive, the nominal interest rate i a¤ects both~ and .…”

“…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, such as Chu and Cozzi (2014) who consider a monetary Schumpeterian growth model with an identical step size of quality improvements, because the distribution of innovations that are implemented is exogenous under a zero entry cost despite random quality improvements. However, in the general case of a positive entry cost, monetary policy a¤ects the distribution of innovations that are implemented.…”

“…To incorporate money demand into this growth-theoretic framework, we impose a cash-in-advance (CIA) constraint on R&D investment. Berentsen et al (2012), Chu and Cozzi (2014) and Chu et al (2015) provide extensive discussion on evidence for the presence of cash requirements on R&D expenditures. 1 We capture these cash requirements using a CIA constraint on R&D.…”

“…In this literature, Marquis and Re¤ett (1994) is the seminal study that analyzes the e¤ects of in ‡ation on innovation in the Romer variety-expanding growth model. In contrast, we analyze the e¤ects of in ‡ation in a Schumpeterian quality-ladder model as in Chu and Lai (2013), Chu and Cozzi (2014), Chu et al (2015) and He and Zou (2016), whose models however feature an identical step size of quality improvements across …rms. Subsequent studies, such as Chu and Ji (2016) and Huang et al (2015), consider monetary policy in a Schumpeterian growth model with both variety expansion and (identical) quality accumulation across …rms.…”

Money, random matching and endogenous growth: A quantitative analysis

“…Then, we use these estimates as an empirical moment to calibrate the model in order to quantitatively evaluate the welfare e¤ects of in ‡ation. We compare the welfare e¤ects of in ‡ation under the search-and-matching endogenous growth model to those from a search-and-matching exogenous growth model 1 There is also a sub-branch of this literature that analyzes the relationship between in ‡ation and innovation-driven economic growth; see for example, Marquis and Re¤ett (1994), Chu and Lai (2013) and Chu and Cozzi (2013). 2 A recent study by Chiu et al (2011) also provides an interesting analysis on the e¤ects of …nancial and search frictions on economic growth, but they do not consider money and in ‡ation.…”