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Monetary policy and endogenous market structure in a Schumpeterian economy

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  • Chu, Angus C.
  • Ji, Lei

Abstract

In this note, we develop a monetary Schumpeterian growth model to explore the effects of monetary policy on endogenous market structure, economic growth and social welfare. We find that an increase in the nominal interest rate reduces the equilibrium number of firms. Although long-run economic growth is independent of the nominal interest rate due to a scale-invariant property of the model, a higher nominal interest rate leads to lower growth rates of innovation, output and consumption during the transition path. Taking into account transition dynamics, we find that social welfare is decreasing in the nominal interest rate; therefore, Friedman rule is socially optimal in this economy.

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File URL: http://mpra.ub.uni-muenchen.de/53339/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40467.

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Date of creation: Aug 2012
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Handle: RePEc:pra:mprapa:40467

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Keywords: monetary policy; economic growth; R&D; endogenous market structure;

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  1. Anthony M. Santomero & John J. Seater, 1996. "Alternative monies and the demand for media of exchange," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 942-964.
  2. 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.
  3. Wang, Ping & Yip, Chong K, 1992. "Alternative Approaches to Money and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(4), pages 553-62, November.
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  5. Peretto, Pietro F., 2007. "Corporate taxes, growth and welfare in a Schumpeterian economy," Journal of Economic Theory, Elsevier, vol. 137(1), pages 353-382, November.
  6. Chu, Angus C. & Lai, Ching-Chong & Liao, Chih-Hsing, 2010. "A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights," MPRA Paper 30105, University Library of Munich, Germany, revised Apr 2011.
  7. Federico Etro, 2012. "Endogenous Market Structures and Welfare," Working Papers 2012_12, Department of Economics, University of Venice "Ca' Foscari".
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  9. Joonkyung Ha & Peter Howitt, 2007. "Accounting for Trends in Productivity and R&D: A Schumpeterian Critique of Semi-Endogenous Growth Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 733-774, 06.
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  14. 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.
  15. Peretto, Pietro F., 1995. "Sunk Costs, Market Structure, and Growth," Working Papers 95-34, Duke University, Department of Economics.
  16. Charles I. Jones, . "Growth: With or Without Scale Effects?," Working Papers 99001, Stanford University, Department of Economics.
  17. Peretto, Pietro F., 1996. "Technological Change and Population Growth," Working Papers 96-28, Duke University, Department of Economics.
  18. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
  19. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
  20. Peretto, Pietro F., 1999. "Cost reduction, entry, and the interdependence of market structure and economic growth," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 173-195, February.
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Cited by:
  1. Chien-Yu Huang & Juin-Jen Chang & Lei Ji, 2013. "Cash-In-Advance Constraint on R&D in a Schumpeterian Growth Model with an Endogenous Market Structure," IEAS Working Paper : academic research 13-A009, Institute of Economics, Academia Sinica, Taipei, Taiwan.

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