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Cash-In-Advance Constraint on R&D in a Schumpeterian Growth Model with an Endogenous Market Structure

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  • Chien-Yu Huang

    ()
    (School of Economics, Southwest University of Finance and Economics, China)

  • Juin-Jen Chang

    ()
    (Institute of Economics, Academia Sinica, Taipei, Taiwan)

  • Lei Ji

    ()
    (School of Economics, Shanghai School of Economics and Finance, China)

Abstract

In this paper we explore the effects of monetary policy on the number of firms, firm market size, ination and growth in a Schumpeterian growth model with endogenous market structure and cash-in-advance (CIA) constraints on two distinct types of R&D investment - in-house R&D and entry investment. This allows us to match empirical evidence and provides novel implications to the literature. We show that if in-house R&D (quality improvement-type R&D) is subject to the CIA constraint, raising the nominal interest rate increases the the number of rms and ination, but decreases the rm size and economic growth. By contrast, if entry investment (variety expansion-type R&D) 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 R&D/entry is restricted by a cash constraint.

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Bibliographic Info

Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 13-A009.

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Length: 27 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:sin:wpaper:13-a009

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

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  1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262200716, December.
  2. Wang, Ping & Yip, Chong K, 1992. "Alternative Approaches to Money and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 24(4), pages 553-62, November.
  3. Bronwyn H. Hall, 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," NBER Working Papers 4096, National Bureau of Economic Research, Inc.
  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. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
  6. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 18(2), pages 203-20, April.
  7. Peter Funk & Bettina Kromen, 2005. "Inflation and Innovation-driven Growth," Working Paper Series in Economics, University of Cologne, Department of Economics 16, University of Cologne, Department of Economics.
  8. Angus C., Chu & Lei, Ji, 2012. "Monetary policy and endogenous market structure in a schumpeterian economy," MPRA Paper 41027, University Library of Munich, Germany.
  9. Andrea Vaona, 2010. "Inflation and Growth in the Long Run: A New Keynesian Theory and Further Semiparametric Evidence," Working Papers, University of Verona, Department of Economics 09/2010, University of Verona, Department of Economics.
  10. Stanley Fischer, 1983. "Inflation and Growth," NBER Working Papers 1235, National Bureau of Economic Research, Inc.
  11. Malerba, Franco, 1992. "Learning by Firms and Incremental Technical Change," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(413), pages 845-59, July.
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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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