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Inflation and innovation with a cash-in-advance constraint on human capital accumulation

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  • He, Qichun

Abstract

This note explores a novel channel – a cash-in-advance (CIA) constraint on endogenous human capital investment – through which monetary policy impacts growth and welfare in a scale-invariant Schumpeterian growth model. We find the following. An increase in the nominal interest rate leads to a decrease in human capital investment, which in turn reduces long-run growth and welfare. Calibration shows that long-run growth increases 0.61% by reducing the nominal interest rate from 9.9% (the sample mean of the U.S.) to 0%. The corresponding welfare gain is equivalent to a permanent increase in consumption of 15.98%. The growth and welfare effects depend on the strength of the CIA constraint on human capital investment. Our study has strong policy implications for developing countries where out-of-pocket money may be important for schooling.

Suggested Citation

  • He, Qichun, 2018. "Inflation and innovation with a cash-in-advance constraint on human capital accumulation," Economics Letters, Elsevier, vol. 171(C), pages 14-18.
  • Handle: RePEc:eee:ecolet:v:171:y:2018:i:c:p:14-18
    DOI: 10.1016/j.econlet.2018.07.010
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    Cited by:

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    3. Sequeira, Tiago Neves, 2021. "Inflation, economic growth and education expenditure," Economic Modelling, Elsevier, vol. 99(C).

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    More about this item

    Keywords

    Monetary policy; Innovation; Cash-in-advance constraint on human capital investment; Economic growth; Welfare;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • I2 - Health, Education, and Welfare - - Education

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