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Inflation, R&D and growth in an open economy

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  • Chu, Angus C.
  • Cozzi, Guido
  • Lai, Ching-Chong
  • Liao, Chih-Hsing

Abstract

This study explores the long-run effects of inflation in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We find that increasing domestic inflation reduces 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, increasing foreign inflation also affects the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of domestic households, the Nash-equilibrium inflation rates are generally higher than the optimal inflation rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. Under the CIA constraint on R&D (consumption), a larger market power of firms amplifies (mitigates) this inflationary bias. We use cross-country panel data to estimate the effects of inflation on R&D and also calibrate the two-country model to data in the Euro Area and the US to quantify the welfare effects of decreasing the inflation rates from the Nash equilibrium to the optimal level.

Suggested Citation

  • Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2015. "Inflation, R&D and growth in an open economy," Journal of International Economics, Elsevier, vol. 96(2), pages 360-374.
  • Handle: RePEc:eee:inecon:v:96:y:2015:i:2:p:360-374
    DOI: 10.1016/j.jinteco.2015.03.007
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    Cited by:

    1. He, Qichun, 2018. "Inflation and Fertility in a Schumpeterian Growth Model: Theory and Evidence," MPRA Paper 85074, University Library of Munich, Germany.
    2. Zheng, Zhijie & Huang, Chien-Yu & Yang, Yibai, 2018. "Inflation and Growth: A Non-Monotonic Relationship in an Innovation-Driven Economy," MPRA Paper 84768, 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 & Fan, Haichao & Furukawa, Yuichi & Liao, Chih-Hsing, 2018. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," MPRA Paper 84711, University Library of Munich, Germany.
    5. repec:eee:reveco:v:51:y:2017:i:c:p:545-561 is not listed on IDEAS
    6. Angus C., Chu & Lei, Ning & Dongming, Zhu, 2016. "Human Capital and Innovation in a Monetary Schumpeterian Growth Model," MPRA Paper 70453, University Library of Munich, Germany.
    7. repec:eee:eecrev:v:98:y:2017:i:c:p:392-409 is not listed on IDEAS
    8. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi & Liao, Chih-Hsing, 2017. "Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms," European Economic Review, Elsevier, vol. 98(C), pages 392-409.
    9. He, Qichun, 2018. "Health and Innovation in a Monetary Schumpeterian Growth Model," MPRA Paper 85218, University Library of Munich, Germany.
    10. repec:eee:moneco:v:94:y:2018:i:c:p:79-93 is not listed on IDEAS

    More about this item

    Keywords

    Inflation; Economic growth; R&D; Trade in intermediate goods;

    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
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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