Cash-In-Advance Constraints in a Schumpeterian Growth Model with an Endogenous Market Structure

This paper explores the macro effects of monetary policy in a Schumpeterian growth model with an endogenous market structure and distinct cash-in-advance (CIA) constraints on consumption, production, and two distinct types of R&D investment - in-house R&D and entry investment. We show that the CIA constraints work through various channels and the effects of monetary policy depend on the strength of each channel. Although ination seems like a uniform tax imposed on the whole economy, an identical monetary policy can render different distortions of ination on the economy and give rise to quite different consequences. Specically, if in-house R&D or quality improvement-type R&D (entry investment or variety expansion-type R&D) is subject to the CIA constraint, raising the nominal interest rate decreases (increases) the firm's market size and economic growth. If either production or consumption is subject to the CIA constraint, growth is immune from money, while the market structure and employment are responsive. Besides, in the presence of various cash constraints our model also generates rich transitional dynamics in response to a change in monetary policy.