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Cash in advance constraint on RD in a Schimpeterian growth model with an endogenous market structure

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Author Info

  • Chienyu Huang

    (Southwestern University of Finance and economics)

  • Juin Jen Chang

    ()
    (Institute of economics, Academia Sinica Taiwan)

  • Lei Ji

    (Ofce sciences-po,skema Business School)

Abstract

In this paper we explore the effects of monetary policy on the number of firms, firm market size, inflation and growth in a Schumpeterian growth model with endogenous market structure and cash-in-advance CIA constraints on two distinct types of RD investment in-house RD and entry investment. This allows us to match the empirical evidence and provides novel implications to the literature. We show that if in-house RD (quality improvement-type R&D) is subject to the CIA constraint, raising the nominal interest rate increases the number of firms and inflation, but decreases the firm size and economic growth. By contrast, if entry investment variety expansion-type RD is subject to the CIA constraint, these variables adversely respond to such a monetary policy. Besides, our model generates rich transitional dynamics in response to a change in monetary policy, when RD entry is restricted by a cash constraint.

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Bibliographic Info

Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2013-16.

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Date of creation: Sep 2013
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Handle: RePEc:fce:doctra:1316

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Keywords: CIA constraints on RD; endogenous market structure; monetary policy; economic growth;

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  1. Yip, C.K. & Wang, P., 1989. "Alternative Approaches To Money And Growth," Papers 8-89-4, Pennsylvania State - Department of Economics.
  2. Chu, Angus C. & Ji, Lei, 2012. "Monetary policy and endogenous market structure in a Schumpeterian economy," MPRA Paper 40467, University Library of Munich, Germany.
  3. Bronwyn H. Hall., 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," Economics Working Papers 92-194, University of California at Berkeley.
  4. Chu, Angus C. & Cozzi, Guido, 2013. "R&D and Economic Growth in a Cash-in-Advance Economy," Economics Working Paper Series 1308, University of St. Gallen, School of Economics and Political Science.
  5. Stanley Fischer, 1983. "Inflation and Growth," NBER Working Papers 1235, National Bureau of Economic Research, Inc.
  6. Andrea Vaona, 2010. "Inflation and Growth in the Long Run: A New Keynesian Theory and Further Semiparametric Evidence," Working Papers 09/2010, University of Verona, Department of Economics.
  7. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
  8. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  9. Funk Peter & Kromen Bettina, 2010. "Inflation and Innovation-Driven Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-52, August.
  10. Malerba, Franco, 1992. "Learning by Firms and Incremental Technical Change," Economic Journal, Royal Economic Society, vol. 102(413), pages 845-59, July.
  11. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
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Cited by:
  1. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "A Schumpeterian Analysis of Monetary Policy, Innovation and North-South Technology Transfer," Economics Working Paper Series 1319, University of St. Gallen, School of Economics and Political Science.

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