IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Monetary Policy, R&D and Economic Growth in an Open Economy

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

This study analyzes the growth and welfare effects of monetary policy in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We find that an increase in the domestic nominal interest rate decreases 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, an increase in the foreign nominal interest rate also decreases economic growth in the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of only domestic households, the Nash-equilibrium nominal interest rates are generally higher than the optimal nominal interest rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. This difference is caused by a cross-country spillover effect of monetary policy arising from trade in intermediate goods. Under the CIA constraint on consumption (R&D investment), a larger market power of firms decreases (increases) the wedge between the Nash-equilibrium and optimal nominal interest rates. We also calibrate the two-country model to data in the Euro Area and the UK and find that the cross-country welfare effects of monetary policy are quantitatively significant.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://mpra.ub.uni-muenchen.de/47364/1/MPRA_paper_47364.pdf
File Function: original version
Download Restriction: no

File URL: https://mpra.ub.uni-muenchen.de/50433/1/MPRA_paper_50433.pdf
File Function: revised version
Download Restriction: no

File URL: https://mpra.ub.uni-muenchen.de/53215/1/MPRA_paper_53215.pdf
File Function: revised version
Download Restriction: no

File URL: https://mpra.ub.uni-muenchen.de/58129/1/MPRA_paper_58129.pdf
File Function: revised version
Download Restriction: no

File URL: https://mpra.ub.uni-muenchen.de/60326/1/MPRA_paper_60326.pdf
File Function: revised version
Download Restriction: no

File URL: https://mpra.ub.uni-muenchen.de/62182/1/MPRA_paper_62182.pdf
File Function: revised version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47364.

as
in new window

Length:
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:pra:mprapa:47364
Contact details of provider: Postal:
Ludwigstraße 33, D-80539 Munich, Germany

Phone: +49-(0)89-2180-2459
Fax: +49-(0)89-2180-992459
Web page: https://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Charles P. Himmelberg & Bruce C. Petersen, 1991. "R&D and internal finance: a panel study of small firms in high-tech industries," Working Paper Series, Macroeconomic Issues 91-25, Federal Reserve Bank of Chicago.
  2. Chienyu Huang & Juin Jen Chang & Lei Ji, 2013. "Cash in advance constraint on RD in a Schimpeterian growth model with an endogenous market structure," Documents de Travail de l'OFCE 2013-16, Observatoire Francais des Conjonctures Economiques (OFCE).
  3. Wai-Ming Ho & Jinli Zeng & Jie Zhang, 2007. "Inflation Taxation and Welfare with Externalities and Leisure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 105-131, 02.
  4. Grossman, Gene & Lai, Edwin, 2002. "International Protection of Intellectual Property," CEPR Discussion Papers 3118, C.E.P.R. Discussion Papers.
  5. Coe, D.T. & Helpman, E., 1993. "International R&D Spillovers," Papers 5-93, Tel Aviv.
  6. Venturini, Francesco, 2012. "Looking into the black box of Schumpeterian growth theories: An empirical assessment of R&D races," European Economic Review, Elsevier, vol. 56(8), pages 1530-1545.
  7. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," UWO Department of Economics Working Papers 8904, University of Western Ontario, Department of Economics.
  8. Alexander W. Hoffmaister & David T. Coe & Elhanan Helpman, 2008. "International R&D Spillovers and Institutions," IMF Working Papers 08/104, International Monetary Fund.
  9. Giammario Impullitti, 2010. "International Competition And U.S. R&D Subsidies: A Quantitative Welfare Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(4), pages 1127-1158, November.
  10. Lee Pinkowitz & Rene M. Stulz & Rohan Williamson, 2003. "Do Firms in Countries with Poor Protection of Investor Rights Hold More Cash?," NBER Working Papers 10188, National Bureau of Economic Research, Inc.
  11. 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.
  12. Charles I. Jones, . "Growth: With or Without Scale Effects?," Working Papers 99001, Stanford University, Department of Economics.
  13. Charles I. Jones & John C. Williams, . "Too Much of a Good Thing? The Economics of Investment in R&D," Working Papers 95006, Stanford University, Department of Economics.
  14. Giancarlo Corsetti & Luca Dedola & Sylvain Leduc, 2010. "Optimal monetary policy in open economies," Economics Working Papers ECO2010/35, European University Institute.
  15. S. Boragan Aruoba & Christopher J. Waller, 2005. "Money and Capital," 2005 Meeting Papers 550, Society for Economic Dynamics.
  16. Thomas F. Cooley & Vincenzo Quadrini, 2003. "Common Currencies vs. Monetary Independence," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 785-806.
  17. Andrea Vaona, 2010. "Inflation and Growth in the Long Run: A New Keynesian Theory and Further Semiparametric Evidence," Working Papers 09/2010, University of Verona, Department of Economics.
  18. Segerstrom, Paul S, 2000. "The Long-Run Growth Effects of R&D Subsidies," Journal of Economic Growth, Springer, vol. 5(3), pages 277-305, September.
  19. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2012. "Do financing constraints matter for R&D?," European Economic Review, Elsevier, vol. 56(8), pages 1512-1529.
  20. Grossman, G.M. & Helpman, E., 1989. "Quality Ledders In The Theory Of Growth," Papers 148, Princeton, Woodrow Wilson School - Public and International Affairs.
  21. repec:dau:papers:123456789/7354 is not listed on IDEAS
  22. David E. Weinstein & Christian Broda, 2004. "Globalization And The Gains From Variety," Econometric Society 2004 Latin American Meetings 327, Econometric Society.
  23. 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, 02.
  24. Maurice Obstfeld and Kenneth Rogoff., 2001. "Global Implications of Self-Oriented National Monetary Rules," Center for International and Development Economics Research (CIDER) Working Papers C01-120, University of California at Berkeley.
  25. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
  26. Silvia Ardagna & Francesco Caselli & Timothy Lane, 2005. "Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries," CEP Discussion Papers dp0670, Centre for Economic Performance, LSE.
  27. Cozzi, Guido & Giordani, Paolo E. & Zamparelli, Luca, 2007. "The refoundation of the symmetric equilibrium in Schumpeterian growth models," Journal of Economic Theory, Elsevier, vol. 136(1), pages 788-797, September.
  28. Bronwyn H. Hall., 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," Economics Working Papers 92-194, University of California at Berkeley.
  29. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 971-984, May.
  30. Bayoumi, Tamim & Coe, David T. & Helpman, Elhanan, 1999. "R&D spillovers and global growth," Journal of International Economics, Elsevier, vol. 47(2), pages 399-428, April.
  31. Cozzi Guido, 2007. "The Arrow Effect under Competitive R&D," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-20, January.
  32. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 55-71, July.
  33. Chu, Angus C. & Cozzi, Guido, 2012. "R&D and economic growth in a cash-in-advance economy," MPRA Paper 39778, University Library of Munich, Germany.
  34. Evers, Michael & Niemann, Stefan & Schiffbauer, Marc, 2009. "Inflation, Liquidity Risk and Long-run TFP - Growth," Papers DYNREG48, Economic and Social Research Institute (ESRI).
  35. Thomas W. Bates & Kathleen M. Kahle & Rene M. Stulz, 2006. "Why Do U.S. Firms Hold So Much More Cash Than They Used To?," NBER Working Papers 12534, National Bureau of Economic Research, Inc.
  36. Niemann, Stefan & Evers, Michael & Schiffbauer, Marc, 2007. "Inflation, Investment Composition and Total Factor Productivity," Economics Discussion Papers 2900, University of Essex, Department of Economics.
  37. Falato, Antonio & Sim, Jae W., 2014. "Why Do Innovative Firms Hold So Much Cash? Evidence from Changes in State R&D Tax Credits," Finance and Economics Discussion Series 2014-72, Board of Governors of the Federal Reserve System (U.S.).
  38. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
  39. Lai, Edwin L. -C. & Qiu, Larry D., 2003. "The North's intellectual property rights standard for the South?," Journal of International Economics, Elsevier, vol. 59(1), pages 183-209, January.
  40. Marquis, M.H. & Reffett, K., 1992. "New Technology Spillovers into the Payment System," Working Papers 1992_04_2, Department of Economics, Florida State University.
  41. Paul R. Bergin & Giancarlo Corsetti, 2013. "International Competitiveness and Monetary Policy: Strategic Policy and Coordination with a Production Relocation Externality," NBER Working Papers 19356, National Bureau of Economic Research, Inc.
  42. Segerstrom, Paul S & Anant, T C A & Dinopoulos, Elias, 1990. "A Schumpeterian Model of the Product Life Cycle," American Economic Review, American Economic Association, vol. 80(5), pages 1077-91, December.
  43. Adrian Orr & Malcolm Edey & Michael Kennedy, 1995. "The Determinants of Real Long-Term Interest Rates: 17 Country Pooled-Time-Series Evidence," OECD Economics Department Working Papers 155, OECD Publishing.
  44. 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.
  45. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  46. Gilbert, R. & Shapiro, C., 1988. "Optimal Patent Length And Breadth," Papers 28, Princeton, Woodrow Wilson School - Discussion Paper.
  47. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York.
  48. repec:esx:essedp:632 is not listed on IDEAS
  49. Peretto, Pietro F., 1996. "Technological Change and Population Growth," Working Papers 96-28, Duke University, Department of Economics.
  50. Peter Howitt, 1999. "Steady Endogenous Growth with Population and R & D Inputs Growing," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 715-730, August.
  51. Park, Walter G., 2008. "International patent protection: 1960-2005," Research Policy, Elsevier, vol. 37(4), pages 761-766, May.
  52. Angus C. Chu, 2008. "Special Interest Politics And Intellectual Property Rights: An Economic Analysis Of Strengthening Patent Protection In The Pharmaceutical Industry," Economics and Politics, Wiley Blackwell, vol. 20(2), pages 185-215, 06.
  53. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
  54. Brown, James R. & Petersen, Bruce C., 2011. "Cash holdings and R&D smoothing," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 694-709, June.
  55. Giammario Impullitti, 2007. "International Schumpeterian Competition and Optimal R&D subsidies," Economics Working Papers ECO2007/55, European University Institute.
  56. Wu, Yangru & Zhang, Junxi, 1998. "Endogenous growth and the welfare costs of inflation: a reconsideration," Journal of Economic Dynamics and Control, Elsevier, vol. 22(3), pages 465-482, March.
  57. Dinopoulos, Elias & Segerstrom, Paul, 2010. "Intellectual property rights, multinational firms and economic growth," Journal of Development Economics, Elsevier, vol. 92(1), pages 13-27, May.
  58. Frederic S. Mishkin, 1991. "Is the Fisher Effect for Real? A Reexamination of the Relationship Between Inflation and Interest Rates," NBER Working Papers 3632, National Bureau of Economic Research, Inc.
  59. Ardagna, Silvia, 2009. "Financial Markets’ Behavior Around Episodes of Large Changes in the Fiscal Stance," Scholarly Articles 2579824, Harvard University Department of Economics.
  60. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, 02.
  61. Stadler, George W, 1990. "Business Cycle Models with Endogenous Technology," American Economic Review, American Economic Association, vol. 80(4), pages 763-78, September.
  62. Ardagna, Silvia, 2009. "Financial markets' behavior around episodes of large changes in the fiscal stance," European Economic Review, Elsevier, vol. 53(1), pages 37-55, January.
  63. Daron Acemoglu & Ufuk Akcigit, 2012. "Intellectual Property Rights Policy, Competition And Innovation," Journal of the European Economic Association, European Economic Association, vol. 10(1), pages 1-42, 02.
  64. David Arseneau, 2007. "The Inflation Tax in an Open Economy with Imperfect Competition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 126-147, January.
  65. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
  66. Michael Dotsey & Peter N. Ireland, 1994. "The welfare cost of inflation in general equilibrium," Working Paper 94-04, Federal Reserve Bank of Richmond.
  67. Tatsuro Iwaisako & Koichi Futagami, 2013. "Patent protection, capital accumulation, and economic growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 631-668, March.
  68. Booth, G. Geoffrey & Ciner, Cetin, 2001. "The relationship between nominal interest rates and inflation: international evidence," Journal of Multinational Financial Management, Elsevier, vol. 11(3), pages 269-280, July.
  69. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
  70. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
  71. Chien-Yu Huang & Juin-Jen Chang & Lei Ji, 2013. "Cash-In-Advance Constraints in a Schumpeterian Growth Model with an Endogenous Market Structure," IEAS Working Paper : academic research 13-A012, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  72. Ramírez, Andrés & Tadesse, Solomon, 2009. "Corporate cash holdings, uncertainty avoidance, and the multinationality of firms," International Business Review, Elsevier, vol. 18(4), pages 387-403, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:47364. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.