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

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  • 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
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    References listed on IDEAS

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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, 2018. "Inflation and Fertility in a Schumpeterian Growth Model: Theory and Evidence," MPRA Paper 85074, University Library of Munich, Germany.
    3. 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.
    4. Bondarev, Anton, 2018. "Heterogeneous R&D spillovers and sustainable growth: Limits to efficient regulation," Working papers 2018/04, Faculty of Business and Economics - University of Basel.
    5. repec:eee:ecmode:v:75:y:2018:i:c:p:159-168 is not listed on IDEAS
    6. Chu, Angus C. & Cozzi, Guido & Fan, Haichao & Furukawa, Yuichi & Liao, Chih-Hsing, 2018. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," MPRA Paper 84711, University Library of Munich, Germany.
    7. OIKAWA Koki & UEDA Kozo, 2018. "Reallocation Effects of Monetary Policy," Discussion papers 18056, Research Institute of Economy, Trade and Industry (RIETI).
    8. repec:eee:reveco:v:58:y:2018:i:c:p:113-126 is not listed on IDEAS
    9. repec:eee:streco:v:46:y:2018:i:c:p:26-42 is not listed on IDEAS
    10. 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.
    11. repec:eee:moneco:v:94:y:2018:i:c:p:79-93 is not listed on IDEAS
    12. 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.

    More about this item

    Keywords

    monetary policy; inflation; economic growth; heterogeneous firms;

    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

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