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R&D and Economic Growth in a Cash-in-Advance Economy

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  • Chu, Angus C.

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  • Cozzi, Guido

    ()

Abstract

R&D investment has well-known liquidity problems, with potentially important consequences. In this paper, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian model with cash-in-advance (CIA) constraints on consumption, R&D investment, and manufacturing. Our results are as follows. Under the CIA constraints on consumption and R&D (manufacturing), an increase in the nominal interest rate would decrease (increase) R&D and economic growth. So long as the effect of cash requirements in R&D is relatively more important than in manufacturing, the nominal interest rate would have an overall negative effect on R&D and economic growth as documented in recent empirical studies. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model. Specifically, we find that the suboptimality or optimality of Friedman rule is closely related to a seemingly unrelated issue that is the overinvestment versus underinvestment of R&D in the market economy, and this result is robust to alternative versions of the Schumpeterian model.

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Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1308.

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Length: 25 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:usg:econwp:2013:08

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Keywords: Economic growth; R&D; quality ladders; cash-in-advance; monetary policy; Friedman rule;

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Citations

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Cited by:
  1. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2013. "Monetary Policy, R&D and Economic Growth in an Open Economy," MPRA Paper 47364, University Library of Munich, Germany.
  2. Angus C., Chu & Lei, Ji, 2012. "Monetary policy and endogenous market structure in a schumpeterian economy," MPRA Paper 41027, University Library of Munich, Germany.
  3. 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.
  4. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "Inflation, Unemployment and Economic Growth in a Schumpeterian Economy," Economics Working Paper Series 1323, University of St. Gallen, School of Economics and Political Science.
  5. Chienyu Huang & Juin Jen Chang & Lei Ji, 2013. "Cash in advance constraint on RD in a Schimpeterian growth model with an endogenous market structure," Documents de Travail de l'OFCE 2013-16, Observatoire Francais des Conjonctures Economiques (OFCE).
  6. Schnell, Fabian, 2013. "Can Monetary Policy Delay the Reallocation of Capital?," Economics Working Paper Series 1329, University of St. Gallen, School of Economics and Political Science.

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