IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/77543.html
   My bibliography  Save this paper

Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms

Author

Listed:
  • Chu, Angus C.
  • Cozzi, Guido
  • Furukawa, Yuichi
  • Liao, Chih-Hsing

Abstract

This study develops a Schumpeterian growth model with endogenous entry of heterogeneous firms to analyze the effects of monetary policy on economic growth via a cash-in-advance constraint on R&D investment. Our results can be summarized as follows. In the special case of a zero entry cost, an increase in the nominal interest rate decreases R&D, the arrival rate of innovations and economic growth as in previous studies. However, in the general case of a positive entry cost, an increase in the nominal interest rate affects the distribution of innovations that are implemented and would have an inverted-U effect on economic growth if the entry cost is sufficiently large. We also calibrate the model to aggregate data of the US economy and find that the growth-maximizing inflation rate is about 3%, which is consistent with recent empirical estimates.

Suggested Citation

  • 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," MPRA Paper 77543, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:77543
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/77543/1/MPRA_paper_77543.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/79555/1/MPRA_paper_79555.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Baldwin, Richard E. & Robert-Nicoud, Frederic, 2008. "Trade and growth with heterogeneous firms," Journal of International Economics, Elsevier, vol. 74(1), pages 21-34, January.
    3. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    4. 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.
    5. Robert B. Barsky & Mark Bergen & Shantanu Dutta & Daniel Levy, 2003. "What Can the Price Gap between Branded and Private-Label Products Tell Us about Markups?," NBER Chapters, in: Scanner Data and Price Indexes, pages 165-225, National Bureau of Economic Research, Inc.
    6. Tatsuro Iwaisako & Kazuyoshi Ohki, 2019. "Innovation by Heterogeneous Leaders," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(4), pages 1673-1704, October.
    7. Tetsugen Haruyama & Laixun Zhao, 2008. "Trade and Firm Heterogeneity In A Quality-Ladder Model of Growth," Discussion Paper Series 223, Research Institute for Economics & Business Administration, Kobe University.
    8. 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, February.
    9. Berentsen, Aleksander & Rojas Breu, Mariana & Shi, Shouyong, 2012. "Liquidity, innovation and growth," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 721-737.
    10. Marquis, Milton H & Reffett, Kevin L, 1994. "New Technology Spillovers into the Payment System," Economic Journal, Royal Economic Society, vol. 104(426), pages 1123-1138, September.
    11. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 43-61.
    12. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    13. 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.
    14. 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.
    15. Antonio Falato & Jae W. Sim, 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.).
    16. Hall, Bronwyn H., 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," Department of Economics, Working Paper Series qt5j59j6x3, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    17. Michael Elsby & Bart Hobijn & Ayseful Sahin, 2013. "The Decline of the U.S. Labor Share," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(2 (Fall)), pages 1-63.
    18. 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.
    19. Angus Chu, 2010. "Effects of patent length on R&D: a quantitative DGE analysis," Journal of Economics, Springer, vol. 99(2), pages 117-140, March.
    20. 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.
    21. Vincenzo Denicolò & Piercarlo Zanchettin, 2010. "Competition, Market Selection and Growth," Economic Journal, Royal Economic Society, vol. 120(545), pages 761-785, June.
    22. Peter Gustafsson & Paul Segerstrom, 2010. "Trade Liberalization and Productivity Growth," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 207-228, May.
    23. repec:dau:papers:123456789/7354 is not listed on IDEAS
    24. 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 402-415, June.
    25. 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.
    26. López-Villavicencio, Antonia & Mignon, Valérie, 2011. "On the impact of inflation on output growth: Does the level of inflation matter?," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 455-464, September.
    27. Chu, Angus C. & Ji, Lei, 2016. "Monetary Policy And Endogenous Market Structure In A Schumpeterian Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 20(5), pages 1127-1145, July.
    28. Vaona, Andrea, 2012. "Inflation And Growth In The Long Run: A New Keynesian Theory And Further Semiparametric Evidence," Macroeconomic Dynamics, Cambridge University Press, vol. 16(1), pages 94-132, February.
    29. Guerrero, Federico, 2006. "Does inflation cause poor long-term growth performance?," Japan and the World Economy, Elsevier, vol. 18(1), pages 72-89, January.
    30. Antonio Minniti & Carmelo Parello & Paul Segerstrom, 2013. "A Schumpeterian growth model with random quality improvements," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(2), pages 755-791, March.
    31. Peretto, Pietro F, 1998. "Technological Change and Population Growth," Journal of Economic Growth, Springer, vol. 3(4), pages 283-311, December.
    32. 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.
    33. Lewis Evans & Neil Quigley & Jie Zhang, 2003. "Optimal price regulation in a growth model with monopolistic suppliers of intermediate goods," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 463-474, May.
    34. Bick, Alexander, 2010. "Threshold effects of inflation on economic growth in developing countries," Economics Letters, Elsevier, vol. 108(2), pages 126-129, August.
    35. Mishkin, Frederic S., 1992. "Is the Fisher effect for real? : A reexamination of the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 195-215, November.
    36. 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.
    37. 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.
    38. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    39. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
    40. Huang, Chien-Yu & Yang, Yibai & Cheng, Chu-Chuan, 2017. "The growth and welfare analysis of patent and monetary policies in a Schumpeterian economy," International Review of Economics & Finance, Elsevier, vol. 52(C), pages 409-426.
    41. 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 1077-1091, December.
    42. Angus C. Chu & Guido Cozzi, 2014. "R&D And Economic Growth In A Cash‐In‐Advance Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 507-524, May.
    43. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Angus C. Chu & Guido Cozzi & Haichao Fan & Yuichi Furukawa, 2021. "Inflation, Unemployment, and Economic Growth in a Schumpeterian Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(3), pages 874-909, July.
    3. 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.
    4. Angus C. Chu, 2022. "Inflation, innovation, and growth: A survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 863-878, July.
    5. Lu, You-Xun & Chen, Shi-kuan & Lai, Ching-chong, 2022. "Monetary Policy and Economic Growth in a Schumpeterian Model with Incumbents and Entrants," MPRA Paper 112177, University Library of Munich, Germany.
    6. 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(5), pages 1875-1894, July.
    7. Hu, Ruiyang & Yang, Yibai & Zheng, Zhijie, 2021. "Inflation, endogenous quality increment, and economic growth," Mathematical Social Sciences, Elsevier, vol. 114(C), pages 72-86.
    8. He, Qichun & Zhang, Zhixiang, 2019. "Inflation and Growth: An Inverted-U Relationship," MPRA Paper 97092, University Library of Munich, Germany.
    9. Zheng, Zhijie & Hu, Ruiyang & Yang, Yibai, 2021. "Inflation, endogenous quality increment, and economic growth," MPRA Paper 106989, University Library of Munich, Germany.
    10. Angus C. Chu & Guido Cozzi & Yuichi Furukawa & Chih‐Hsing Liao, 2019. "Inflation and Innovation in a Schumpeterian Economy with North–South Technology Transfer," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 683-719, March.
    11. Huang, Chien-Yu & Yang, Yibai & Zheng, Zhijie, 2018. "Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors," MPRA Paper 87462, University Library of Munich, Germany.
    12. Lu, You-Xun, 2022. "Interactive effects of monetary policy and patent protection: The role of endogenous innovation size," Economic Modelling, Elsevier, vol. 113(C).
    13. Angus C. Chu & Guido Cozzi, 2014. "R&D And Economic Growth In A Cash‐In‐Advance Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 507-524, May.
    14. Zheng, Zhijie & Huang, Chien-Yu & Yang, Yibai, 2021. "Inflation And Growth: A Non-Monotonic Relationship In An Innovation-Driven Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 25(5), pages 1199-1226, July.
    15. He, Qichun & Wang, Xilin, 2020. "Money, Human Capital and Endogenous Market Structure in a Schumpeterian Economy," MPRA Paper 104609, University Library of Munich, Germany.
    16. Zheng, Zhijie & Huang, Chien-Yu & Wan, Xi, 2020. "Human Capital and Income Inequality in a Monetary Schumpeterian Growth Model," MPRA Paper 101912, University Library of Munich, Germany.
    17. Angus C. Chu, 2022. "Patent policy and economic growth: A survey," Manchester School, University of Manchester, vol. 90(2), pages 237-254, March.
    18. He, Qichun, 2023. "The inverted-U effect of inflation on growth: Cross-country evidence," Economic Modelling, Elsevier, vol. 128(C).
    19. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "A Schumpeterian Analysis of Monetary Policy, Innovation and North-South Technology Transfer," Economics Working Paper Series 1319, University of St. Gallen, School of Economics and Political Science.
    20. Zheng, Zhijie & Wan, Xi & Huang, Chien-Yu, 2023. "Inflation and income inequality in a Schumpeterian economy with heterogeneous wealth and skills," Economic Modelling, Elsevier, vol. 121(C).

    More about this item

    Keywords

    monetary policy; inflation; economic growth; heterogeneous firms;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:77543. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.