IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/106989.html
   My bibliography  Save this paper

Inflation, endogenous quality increment, and economic growth

Author

Listed:
  • Zheng, Zhijie
  • Hu, Ruiyang
  • Yang, Yibai

Abstract

This study explores the effects of monetary policy in a Schumpeterian growth model with endogenous quality increment and distinct cash-in-advance (CIA) constraints on consumption, manufacturing and R&D investment. Our results are summarized as follows. When the CIA constraint is solely on consumption expenditure, an increase in the nominal interest rate may stifle economic growth by lowering the arrival rate of innovation and stimulate it at the same time by raising the size of quality increment. An additional CIA constraint on manufacturing weakens the growth-retarding effect and enhances the growth-promoting effect, whereas an additional CIA constraint on R&D investment strengthens only the negative growth effect. The quantitative analysis finds that the relationship between inflation and growth can be either monotonically decreasing or hump-shaped, but the welfare effect of inflation is always negative.

Suggested Citation

  • Zheng, Zhijie & Hu, Ruiyang & Yang, Yibai, 2021. "Inflation, endogenous quality increment, and economic growth," MPRA Paper 106989, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106989
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/106989/1/MPRA_paper_106989.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Cozzi, Guido & Giordani, Paolo E. & Zamparelli, Luca, 2007. "The refoundation of the symmetric equilibrium in Schumpeterian growth models," Journal of Economic Theory, Elsevier, vol. 136(1), pages 788-797, September.
    2. Arawatari, Ryo & Hori, Takeo & Mino, Kazuo, 2018. "On the nonlinear relationship between inflation and growth: A theoretical exposition," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 79-93.
    3. Burdekin, Richard C.K. & Denzau, Arthur T. & Keil, Manfred W. & Sitthiyot, Thitithep & Willett, Thomas D., 2004. "When does inflation hurt economic growth? Different nonlinearities for different economies," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 519-532, September.
    4. Johannes Stroebel & Joseph Vavra, 2019. "House Prices, Local Demand, and Retail Prices," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 1391-1436.
    5. Jones, Charles I & Williams, John C, 2000. "Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March.
    6. Marquis, Milton H & Reffett, Kevin L, 1994. "New Technology Spillovers into the Payment System," Economic Journal, Royal Economic Society, vol. 104(426), pages 1123-1138, September.
    7. Bond, Eric W. & Wang, Ping & Yip, Chong K., 1996. "A General Two-Sector Model of Endogenous Growth with Human and Physical Capital: Balanced Growth and Transitional Dynamics," Journal of Economic Theory, Elsevier, vol. 68(1), pages 149-173, January.
    8. Haskel, Jonathan & Martin, Christopher & Small, Ian, 1995. "Price, Marginal Cost and the Business Cycle," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(1), pages 25-41, February.
    9. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 43-61.
    10. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    11. Phaneuf, Louis & Sims, Eric & Victor, Jean Gardy, 2018. "Inflation, output and markup dynamics with purely forward-looking wage and price setters," European Economic Review, Elsevier, vol. 105(C), pages 115-134.
    12. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1-1.
    13. Jordi Galí & Mark Gertler & J. David López-Salido, 2007. "Markups, Gaps, and the Welfare Costs of Business Fluctuations," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 44-59, November.
    14. Angus C. Chu & Ching‐Chong Lai, 2013. "Money and the Welfare Cost of Inflation in an R&D Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 233-249, February.
    15. Oikawa, Koki & Ueda, Kozo, 2018. "The optimal inflation rate under Schumpeterian growth," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 114-125.
    16. Samuel S. Kortum, 1997. "Research, Patenting, and Technological Change," Econometrica, Econometric Society, vol. 65(6), pages 1389-1420, November.
    17. López-Villavicencio, Antonia & Mignon, Valérie, 2011. "On the impact of inflation on output growth: Does the level of inflation matter?," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 455-464, September.
    18. Chu, Angus C. & Ji, Lei, 2016. "Monetary Policy And Endogenous Market Structure In A Schumpeterian Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 20(5), pages 1127-1145, July.
    19. Vaona, Andrea, 2012. "Inflation And Growth In The Long Run: A New Keynesian Theory And Further Semiparametric Evidence," Macroeconomic Dynamics, Cambridge University Press, vol. 16(1), pages 94-132, February.
    20. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi & Liao, Chih-Hsing, 2017. "Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms," European Economic Review, Elsevier, vol. 98(C), pages 392-409.
    21. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
    22. Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
    23. Pedro Mazeda Gil & Gustavo Iglésias, 2020. "Endogenous Growth and Real Effects of Monetary Policy: R&D and Physical Capital Complementarities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1147-1197, August.
    24. Zheng, Zhijie & Huang, Chien-Yu & Yang, Yibai, 2021. "Inflation And Growth: A Non-Monotonic Relationship In An Innovation-Driven Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 25(5), pages 1199-1226, July.
    25. Peretto, Pietro F, 1998. "Technological Change and Population Growth," Journal of Economic Growth, Springer, vol. 3(4), pages 283-311, December.
    26. Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 195-215, November.
    27. Stephanie Kremer & Alexander Bick & Dieter Nautz, 2013. "Inflation and growth: new evidence from a dynamic panel threshold analysis," Empirical Economics, Springer, vol. 44(2), pages 861-878, April.
    28. Bils, Mark, 1987. "The Cyclical Behavior of Marginal Cost and Price," American Economic Review, American Economic Association, vol. 77(5), pages 838-855, December.
    29. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
    30. John Laitner & Dmitriy Stolyarov, 2013. "Derivative Ideas And The Value Of Intangible Assets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(1), pages 59-95, February.
    31. Christopher J. Nekarda & Valerie A. Ramey, 2020. "The Cyclical Behavior of the Price‐Cost Markup," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S2), pages 319-353, December.
    32. Huang, Chien-Yu & Yang, Yibai & Cheng, Chu-Chuan, 2017. "The growth and welfare analysis of patent and monetary policies in a Schumpeterian economy," International Review of Economics & Finance, Elsevier, vol. 52(C), pages 409-426.
    33. Jean Olson Lanjouw, 1998. "Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(4), pages 671-710.
    34. Peter Howitt, 1999. "Steady Endogenous Growth with Population and R & D Inputs Growing," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 715-730, August.
    35. Angus C. Chu & Guido Cozzi, 2014. "R&D And Economic Growth In A Cash‐In‐Advance Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 507-524, May.
    36. Pietro Peretto & Michelle Connolly, 2007. "The Manhattan Metaphor," Journal of Economic Growth, Springer, vol. 12(4), pages 329-350, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lu, You-Xun & Lai, Ching-Chong, 2021. "Effects of patent policy on growth and inequality: A perspective of exogenous and endogenous quality improvements," MPRA Paper 111183, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hu, Ruiyang & Yang, Yibai & Zheng, Zhijie, 2021. "Inflation, endogenous quality increment, and economic growth," Mathematical Social Sciences, Elsevier, vol. 114(C), pages 72-86.
    2. Huang, Chien-Yu & Yang, Yibai & Zheng, Zhijie, 2018. "Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors," MPRA Paper 87462, University Library of Munich, Germany.
    3. He, Qichun & Zhang, Zhixiang, 2019. "Inflation and Growth: An Inverted-U Relationship," MPRA Paper 97092, University Library of Munich, Germany.
    4. Zheng, Zhijie & Huang, Chien-Yu & Yang, Yibai, 2021. "Inflation And Growth: A Non-Monotonic Relationship In An Innovation-Driven Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 25(5), pages 1199-1226, July.
    5. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    6. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi & Liao, Chih-Hsing, 2017. "Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms," European Economic Review, Elsevier, vol. 98(C), pages 392-409.
    7. Lu, You-Xun & Chen, Shi-kuan & Lai, Ching-chong, 2022. "Monetary Policy and Economic Growth in a Schumpeterian Model with Incumbents and Entrants," MPRA Paper 112177, University Library of Munich, Germany.
    8. Angus C. Chu, 2022. "Inflation, innovation, and growth: A survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 863-878, July.
    9. Chu, Angus C. & Ning, Lei & Zhu, Dongming, 2019. "Human Capital And Innovation In A Monetary Schumpeterian Growth Model," Macroeconomic Dynamics, Cambridge University Press, vol. 23(5), pages 1875-1894, July.
    10. Angus C. Chu & Guido Cozzi & Haichao Fan & Yuichi Furukawa, 2021. "Inflation, Unemployment, and Economic Growth in a Schumpeterian Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(3), pages 874-909, July.
    11. Zheng, Zhijie & Huang, Chien-Yu & Wan, Xi, 2020. "Human Capital and Income Inequality in a Monetary Schumpeterian Growth Model," MPRA Paper 101912, University Library of Munich, Germany.
    12. He, Qichun, 2023. "The inverted-U effect of inflation on growth: Cross-country evidence," Economic Modelling, Elsevier, vol. 128(C).
    13. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2015. "Inflation, R&D and growth in an open economy," Journal of International Economics, Elsevier, vol. 96(2), pages 360-374.
    14. He, Qichun & Wang, Xilin, 2020. "Money, Human Capital and Endogenous Market Structure in a Schumpeterian Economy," MPRA Paper 104609, University Library of Munich, Germany.
    15. Lu, You-Xun, 2022. "Interactive effects of monetary policy and patent protection: The role of endogenous innovation size," Economic Modelling, Elsevier, vol. 113(C).
    16. Zheng, Zhijie & Wan, Xi & Huang, Chien-Yu, 2023. "Inflation and income inequality in a Schumpeterian economy with heterogeneous wealth and skills," Economic Modelling, Elsevier, vol. 121(C).
    17. Angus C. Chu & Guido Cozzi, 2014. "R&D And Economic Growth In A Cash‐In‐Advance Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 507-524, May.
    18. Chien‐Yu Huang & Youchang Wu & Yibai Yang & Zhijie Zheng, 2023. "Monetary Policy in a Schumpeterian Growth Model with Vertical R&D Sectors," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(6), pages 1569-1607, September.
    19. Gray, Elie & Grimaud, André, 2014. "The Lindahl equilibrium in Schumpeterian growth models: Knowledge diffusion, social value of innovations and optimal R&D incentives," TSE Working Papers 14-469, Toulouse School of Economics (TSE).
    20. FURUKAWA Yuichi & NIWA Sumiko, 2021. "Deflation and Declining Business Dynamism in a Cash-in-Advance Economy," Discussion papers 21058, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    Monetary Policy; Economic Growth; R&D; Endogenous Quality Increment;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:106989. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.