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A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights

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

How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D. Furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the growth and welfare effects of monetary policy in the AK model. Therefore, the market power of firms has drastically different implications on the welfare cost of inflation under the two growth engines (i.e., innovation versus capital accumulation). We also calibrate the two models using data in the US and the Euro Area to quantitatively evaluate and compare the welfare cost of inflation in the two economies. Finally, we simulate transition dynamics of the R&D model in order to compute the complete welfare changes from reducing inflation.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30105.

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Date of creation: Oct 2010
Date of revision: Apr 2011
Handle: RePEc:pra:mprapa:30105
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