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Human Capital And Innovation In A Monetary Schumpeterian Growth Model

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  • Chu, Angus C.
  • Ning, Lei
  • Zhu, Dongming

Abstract

This study explores the growth and welfare effects of monetary policy in a scale-invariant Schumpeterian growth model with endogenous human capital accumulation. We model money demand via a cash-in-advance (CIA) constraint on research and development (R&D) investment. Our results can be summarized as follows. We find that an increase in the nominal interest rate leads to a decrease in R&D and human capital investment, which, in turn, reduces the long-run growth rates of technology and output. This result stands in stark contrast to the case of exogenous human capital accumulation in which the long-run growth rates of technology and output are independent of the nominal interest rate. Simulating the transitional dynamics, we find that the additional long-run growth effect under endogenous human capital accumulation amplifies the welfare effect of monetary policy. Decreasing the nominal interest rate from 10% to 0% leads to a welfare gain that is equivalent to a permanent increase in consumption of 2.82% (2.38%) under endogenous (exogenous) human capital accumulation.

Suggested Citation

  • Chu, Angus C. & Ning, Lei & Zhu, Dongming, 2019. "Human Capital And Innovation In A Monetary Schumpeterian Growth Model," Macroeconomic Dynamics, Cambridge University Press, vol. 23(5), pages 1875-1894, July.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:05:p:1875-1894_00
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    Cited by:

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    3. Oscar Afonso & Tiago Sequeira, 2023. "The Effect of Inflation on Wage Inequality: A North–South Monetary Model of Endogenous Growth with International Trade," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(1), pages 215-249, February.
    4. Afonso, Oscar, 2023. "Inflation, technological-knowledge bias, and wages," Research in Economics, Elsevier, vol. 77(1), pages 91-103.
    5. Sequeira, Tiago Neves, 2021. "Inflation, economic growth and education expenditure," Economic Modelling, Elsevier, vol. 99(C).
    6. Zheng, Zhijie & Huang, Chien-Yu & Wan, Xi, 2020. "Human Capital and Income Inequality in a Monetary Schumpeterian Growth Model," MPRA Paper 101912, University Library of Munich, Germany.
    7. Daiki Maeda & Yuki Saito, 2020. "Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation," ISER Discussion Paper 1076r, Institute of Social and Economic Research, Osaka University, revised Jun 2020.
    8. Angus C. Chu, 2022. "Inflation, innovation, and growth: A survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 863-878, July.
    9. Sanchez-Carrera Edgar J. & Travaglini Giuseppe & Ille Sebastian, 2021. "Macrodynamic Modeling of Innovation Equilibria and Traps," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(2), pages 659-694, June.
    10. Daiki Maeda & Yuki Saito, 2020. "Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation," ISER Discussion Paper 1076, Institute of Social and Economic Research, Osaka University.
    11. Oscar Afonso & Pedro G. Lima, 2023. "Effects of monetary policy on the skill premium and the growth rate in a directed technical change model with heterogeneous cash‐in‐advance constraints," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4020-4036, October.
    12. Oscar Afonso & Rosa Forte, 2023. "How powerful are fiscal and monetary policies in a directed technical change model with humans and robots?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 3008-3032, July.
    13. He, Qichun, 2023. "The inverted-U effect of inflation on growth: Cross-country evidence," Economic Modelling, Elsevier, vol. 128(C).
    14. Afonso, Oscar & Pinho, Mafalda, 2022. "How to reverse a negative asymmetric labor productivity shock in the European Union? A directed technical change analysis with fiscal and monetary policies," Mathematical Social Sciences, Elsevier, vol. 116(C), pages 47-67.
    15. Pedro Mazeda Gil & Gustavo Iglésias, 2020. "Endogenous Growth and Real Effects of Monetary Policy: R&D and Physical Capital Complementarities," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1147-1197, August.
    16. Oscar Afonso, 2023. "Losers and losses of COVID-19: a directed technical change analysis with fiscal and monetary policies," Economic Change and Restructuring, Springer, vol. 56(3), pages 1777-1821, June.
    17. He, Qichun & Wang, Xilin, 2020. "Money, Human Capital and Endogenous Market Structure in a Schumpeterian Economy," MPRA Paper 104609, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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