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A Schumpeterian Analysis of Monetary Policy, Innovation and North-South Technology Transfer

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  • Chu, Angus C.

    ()

  • Cozzi, Guido

    ()

  • Furukawa, Yuichi

    ()

Abstract

This study analyzes the cross-country effects of monetary policy on innovation and international technology transfer. We consider a scale-invariant North-South quality-ladder model that features innovative R&D in the North and adaptive R&D in the South. To model money demand, we impose cash-in-advance constraints on these two types of R&D investment. We find that an increase in the Southern nominal interest rate causes a permanent decrease in the rate of international technology transfer, a permanent increase in the North-South wage gap, and a temporary decrease in the rate of Northern innovation. An increase in the Northern nominal interest rate causes a temporary decrease in the rate of Northern innovation, a permanent decrease in the North-South wage gap, and an ambiguous effect on the rate of international technology transfer depending on the relative size of the two economies. We also calibrate the model to China-US data and find that the cross-country welfare effects of monetary policy are quantitatively significant. Specifically, permanently decreasing the nominal interest rate to zero in China leads to a welfare gain of 3.37% in China and a welfare gain of 1.25% in the US. Permanently decreasing the nominal interest rate to zero in the US leads to welfare gains of 0.33% in the US and 1.24% in China.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/econwp/EWP-1319.pdf
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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 1319.

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Length: 27 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:usg:econwp:2013:19

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Keywords: Monetary policy; economic growth; R&D; North-South product cycles; FDI;

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