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Money and the Welfare Cost of Inflation in an R&D Growth Model

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  • ANGUS C. CHU
  • CHING‐CHONG LAI

Abstract

This study analyzes the effects of inflation on R&D and innovation-driven growth. In the theoretical section, we incorporate money demand into a quality-ladder model with elastic labor supply and derive the following results. If the elasticity of substitution between consumption and the real money balance is less (greater) than unity, then R&D and output growth are decreasing (increasing) in inflation. If either labor supply is inelastic or the elasticity of substitution between consumption and the real money balance is unity, then social welfare monotonically increases as the nominal interest rate approaches zero (i.e. the Friedman rule). Quantitatively, decreasing inflation in the US to achieve price stability improves welfare (equivalent to a permanent increase in consumption of at least 0.5%). In the empirical section, we use cross-country data to establish a negative and statistically significant relationship between inflation and R&D.
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Suggested Citation

  • Angus C. Chu & Ching‐Chong Lai, 2013. "Money and the Welfare Cost of Inflation in an R&D Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 233-249, February.
  • Handle: RePEc:mcb:jmoncb:v:45:y:2013:i:1:p:233-249
    DOI: j.1538-4616.2012.00568.x
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    File URL: http://hdl.handle.net/10.1111/j.1538-4616.2012.00568.x
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    Cited by:

    1. repec:eee:ecolet:v:171:y:2018:i:c:p:14-18 is not listed on IDEAS
    2. He, Qichun & Zou, Heng-fu, 2016. "Does inflation cause growth in the reform-era China? Theory and evidence," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 470-484.
    3. Wan, Jing & Zhang, Jie, 2016. "Money and growth through innovation cycles with leisure," Economics Letters, Elsevier, vol. 148(C), pages 23-26.
    4. 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.
    5. 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.
    6. Chu, Angus C. & Kan, Kamhon & Lai, Ching-Chong & Liao, Chih-Hsing, 2014. "Money, random matching and endogenous growth: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 173-187.
    7. repec:cup:macdyn:v:23:y:2019:i:05:p:1875-1894_00 is not listed on IDEAS
    8. Chang, Juin-Jen & Lai, Ching-Chong & Liao, Chih-Hsing, 2017. "Welfare Cost of Inflation: The Role of Price Markups and Increasing Returns to Production Specialization," MPRA Paper 77753, University Library of Munich, Germany.
    9. Neto, António & Furukawa, Yuichi & Ribeiro, Ana Paula, 2017. "Can Trade Unions Increase Social Welfare? An R&D Model with Cash-in-Advance Constraints," MPRA Paper 77312, University Library of Munich, Germany.
    10. repec:eee:ecmode:v:75:y:2018:i:c:p:159-168 is not listed on IDEAS
    11. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    12. 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(05), pages 1875-1894, July.
    13. repec:eee:eecrev:v:98:y:2017:i:c:p:392-409 is not listed on IDEAS
    14. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "Inflation, Unemployment and Economic Growth in a Schumpeterian Economy," MPRA Paper 50510, University Library of Munich, Germany.
    15. 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.
    16. He, Qichun, 2018. "Health and Innovation in a Monetary Schumpeterian Growth Model," MPRA Paper 85218, University Library of Munich, Germany.
    17. repec:eee:moneco:v:94:y:2018:i:c:p:79-93 is not listed on IDEAS
    18. 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.
    19. Arawatari, Ryo & Hori, Takeo & Mino, Kazuo, 2018. "On the nonlinear relationship between inflation and growth: A theoretical exposition," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 79-93.
    20. Rangan Gupta & Lardo Stander & Andrea Vaona, 2017. "Openness and Growth: Is the Relationship Non-Linear?," Working Papers 201703, University of Pretoria, Department of Economics.

    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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