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Monetary Policy, R&D and Economic Growth in an Open Economy

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  • Chu, Angus C.
  • Cozzi, Guido
  • Lai, Ching-Chong
  • Liao, Chih-Hsing

Abstract

This study analyzes the growth and welfare effects of monetary policy in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We find that an increase in the domestic nominal interest rate decreases domestic R&D investment and the growth rate of domestic technology. Given that economic growth in a country depends on both domestic and foreign technologies, an increase in the foreign nominal interest rate also decreases economic growth in the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of only domestic households, the Nash-equilibrium nominal interest rates are generally higher than the optimal nominal interest rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. This difference is caused by a cross-country spillover effect of monetary policy arising from trade in intermediate goods. Under the CIA constraint on consumption (R&D investment), a larger market power of firms decreases (increases) the wedge between the Nash-equilibrium and optimal nominal interest rates. We also calibrate the two-country model to data in the Euro Area and the UK and find that the cross-country welfare effects of monetary policy are quantitatively significant.

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File URL: http://mpra.ub.uni-muenchen.de/50433/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47364.

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Date of creation: Jun 2013
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Handle: RePEc:pra:mprapa:47364

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Keywords: monetary policy; economic growth; R&D; trade in intermediate goods.;

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References

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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," MPRA Paper 49533, University Library of Munich, Germany.

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