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Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors

Author

Listed:
  • Huang, Chien-Yu
  • Yang, Yibai
  • Zheng, Zhijie

Abstract

This study investigates the effects of monetary policy on economic growth and social welfare in a Schumpeterian economy with an upstream and a downstream sector in which the R&D investment of these sectors is subject to a cash-in-advance (CIA) constraint. We show that a higher nominal interest rate reallocates labor from a more cash-constrained R&D sector to a less one, which could generate an inverted-U effect on economic growth. In addition, we examine the necessary and sufficient conditions for the (sub)optimality of the Friedman rule by relating the underinvestment and overinvestment of R&D in the decentralized economy, and find that this relationship is crucially determined by the presence of CIA constraints, the relative productivity between upstream R&D and downstream R&D, and the strength of markup.

Suggested Citation

  • 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.
  • Handle: RePEc:pra:mprapa:87462
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    File URL: https://mpra.ub.uni-muenchen.de/87462/1/MPRA_paper_87462.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    CIA constraint; Endogenous growth; Monetary policy; Two R&D sectors;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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