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Monetary policy and endogenous market structure in a Schumpeterian economy

  • Chu, Angus C.
  • Ji, Lei

In this note, we develop a monetary Schumpeterian growth model to explore the effects of monetary policy on endogenous market structure, economic growth and social welfare. We find that an increase in the nominal interest rate reduces the equilibrium number of firms. Although long-run economic growth is independent of the nominal interest rate due to a scale-invariant property of the model, a higher nominal interest rate leads to lower growth rates of innovation, output and consumption during the transition path. Taking into account transition dynamics, we find that social welfare is decreasing in the nominal interest rate; therefore, Friedman rule is socially optimal in this economy.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40467.

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Date of creation: Aug 2012
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Handle: RePEc:pra:mprapa:40467
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  1. Mulligan, Casey B & Sala-I-Martin, Xavier X, 1997. "The Optimum Quantity of Money: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 687-715, November.
  2. Max Gillman & Michal Kejak, 2005. "Contrasting Models of the Effect of Inflation on Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 19(1), pages 113-136, 02.
  3. Anthony M. Santomero & John J. Seater, 1995. "Alternative Monies and the Demand for Media of Exchange," Center for Financial Institutions Working Papers 96-08, Wharton School Center for Financial Institutions, University of Pennsylvania.
  4. Peretto, Pietro F., 1995. "Sunk Costs, Market Structure, and Growth," Working Papers 95-34, Duke University, Department of Economics.
  5. Peretto, Pietro F., 1996. "Technological Change and Population Growth," Working Papers 96-28, Duke University, Department of Economics.
  6. Federico Etro, 2012. "Endogenous Market Structures and Welfare," Working Papers 2012_12, Department of Economics, University of Venice "Ca' Foscari".
  7. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May.
  8. Peretto, Pietro F., 2007. "Corporate taxes, growth and welfare in a Schumpeterian economy," Journal of Economic Theory, Elsevier, vol. 137(1), pages 353-382, November.
  9. Yip, C.K. & Wang, P., 1989. "Alternative Approaches To Money And Growth," Papers 8-89-4, Pennsylvania State - Department of Economics.
  10. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
  11. Chu, Angus C. & Lai, Ching-Chong & Liao, Chih-Hsing, 2010. "A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights," MPRA Paper 30105, University Library of Munich, Germany, revised Apr 2011.
  12. Joonkyung Ha & Peter Howitt, 2007. "Accounting for Trends in Productivity and R&D: A Schumpeterian Critique of Semi-Endogenous Growth Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 733-774, 06.
  13. Peretto, Pietro F., 1999. "Cost reduction, entry, and the interdependence of market structure and economic growth," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 173-195, February.
  14. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
  15. Marquis, M.H. & Reffett, K., 1992. "New Technology Spillovers into the Payment System," Working Papers 1992_04_2, Department of Economics, Florida State University.
  16. Funk Peter & Kromen Bettina, 2010. "Inflation and Innovation-Driven Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-52, August.
  17. Chu, Angus C. & Cozzi, Guido, 2013. "R&D and Economic Growth in a Cash-in-Advance Economy," Economics Working Paper Series 1308, University of St. Gallen, School of Economics and Political Science.
  18. Christopher Laincz & Pietro Peretto, 2006. "Scale effects in endogenous growth theory: an error of aggregation not specification," Journal of Economic Growth, Springer, vol. 11(3), pages 263-288, September.
  19. Stefan Niemann & Michael Evers & Marc Schiffbauer, 2007. "Inflation, Investment Composition and Total Factor Productivity," Economics Discussion Papers 632, University of Essex, Department of Economics.
  20. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
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