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Monetary Policy, Financial Frictions, and Heterogeneous R&D Firms in an Endogenous Growth Model

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  • Takeo Hori

Abstract

Motivated by empirical facts, I construct an endogenous growth model in which heterogeneous research and development (R&D) firms are financially constrained and use cash to finance R&D investments. I also examine the optimal monetary policy. The effects of financial constraint crucially depend on whether R&D firms are homogeneous or heterogeneous regarding R&D productivity. If R&D firms are homogeneous, then the zero nominal interest rate (i.e., the Friedman rule) is always optimal under severe financial constraint. Heterogeneity in R&D productivity leads to the opposite result. With heterogeneity, severe financial constraint makes the strictly positive nominal interest rate welfare‐improving under a plausible condition.

Suggested Citation

  • Takeo Hori, 2020. "Monetary Policy, Financial Frictions, and Heterogeneous R&D Firms in an Endogenous Growth Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(4), pages 1343-1373, October.
    • Handle: RePEc:bla:scandj:v:122:y:2020:i:4:p:1343-1373
    DOI: 10.1111/sjoe.12387
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    References listed on IDEAS

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