Advanced Search
MyIDEAS: Login to save this paper or follow this series

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

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1315.pdf
Download Restriction: no

Bibliographic Info

Paper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1315.

as in new window
Length: 34 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:usg:econwp:2013:15

Contact details of provider:
Postal: Dufourstrasse 50, CH - 9000 St.Gallen
Phone: +41 71 224 23 25
Fax: +41 71 224 31 35
Email:
Web page: http://www.seps.unisg.ch/
More information through EDIRC

Related research

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

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  2. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(3), pages 387-393.
  3. Brown, James R. & Petersen, Bruce C., 2011. "Cash holdings and R&D smoothing," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(3), pages 694-709, June.
  4. Gilbert, R. & Shapiro, C., 1988. "Optimal Patent Length And Breadth," Papers, Princeton, Woodrow Wilson School - Discussion Paper 28, Princeton, Woodrow Wilson School - Discussion Paper.
  5. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(1), pages 55-71, July.
  6. Gene M. Grossman & Elhanan Helpman, 1989. "Quality Ladders in the Theory of Growth," NBER Working Papers 3099, National Bureau of Economic Research, Inc.
  7. Charles I. Jones & John C. Williams, . "Too Much of a Good Thing? The Economics of Investment in R&D," Working Papers, Stanford University, Department of Economics 95006, Stanford University, Department of Economics.
  8. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  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. Peretto, Pietro F., 1996. "Technological Change and Population Growth," Working Papers, Duke University, Department of Economics 96-28, Duke University, Department of Economics.
  11. Chu, Angus C. & Cozzi, Guido, 2012. "R&D and economic growth in a cash-in-advance economy," MPRA Paper 39778, University Library of Munich, Germany.
  12. 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.
  13. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 527, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Tim Opler & Lee Pinkowitz & Rene Stulz & Rohan Williamson, 1997. "The Determinants and Implications of Corporate Cash Holdings," NBER Working Papers 6234, National Bureau of Economic Research, Inc.
  15. Thomas F. Cooley & Vincenzo Quadrini, 2003. "Common Currencies vs. Monetary Independence," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(4), pages 785-806, October.
  16. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 59(8), pages 721-737.
  17. Peter Howitt, 1999. "Steady Endogenous Growth with Population and R & D Inputs Growing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(4), pages 715-730, August.
  18. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(5), pages 971-984, May.
  19. Gene M. Grossman & Edwin L.-C. Lai, 2002. "International Protection of Intellectual Property," CESifo Working Paper Series 790, CESifo Group Munich.
  20. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 80(5), pages 1077-91, December.
  21. Cozzi Guido, 2007. "The Arrow Effect under Competitive R&D," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 7(1), pages 1-20, January.
  22. Marquis, M.H. & Reffett, K., 1992. "New Technology Spillovers into the Payment System," Working Papers, Department of Economics, Florida State University 1992_04_2, Department of Economics, Florida State University.
  23. Stefan Niemann & Michael Evers & Marc Schiffbauer, 2007. "Inflation, Investment Composition and Total Factor Productivity," Economics Discussion Papers, University of Essex, Department of Economics 632, University of Essex, Department of Economics.
  24. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, American Economic Association, vol. 88(5), pages 1290-1310, December.
  25. Charles I. Jones, . "Growth: With or Without Scale Effects?," Working Papers, Stanford University, Department of Economics 99001, Stanford University, Department of Economics.
  26. Christopher Laincz & Pietro Peretto, 2006. "Scale effects in endogenous growth theory: an error of aggregation not specification," Journal of Economic Growth, Springer, Springer, vol. 11(3), pages 263-288, September.
  27. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2012. "Do financing constraints matter for R&D?," European Economic Review, Elsevier, Elsevier, vol. 56(8), pages 1512-1529.
  28. Tatsuro Iwaisako & Koichi Futagami, 2013. "Patent protection, capital accumulation, and economic growth," Economic Theory, Springer, Springer, vol. 52(2), pages 631-668, March.
  29. Cozzi, Guido & Giordani, Paolo E. & Zamparelli, Luca, 2007. "The refoundation of the symmetric equilibrium in Schumpeterian growth models," Journal of Economic Theory, Elsevier, Elsevier, vol. 136(1), pages 788-797, September.
  30. David Arseneau, 2007. "The Inflation Tax in an Open Economy with Imperfect Competition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 126-147, January.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

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.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:usg:econwp:2013:15. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martina Flockerzi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.