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A Tale of Two Growth Engines: The Interactive Effects of Monetary Policy and Intellectual Property Rights

How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D; furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the effects of monetary policy in the AK model. In other words, the market power of firms has surprisingly opposite implications on the growth and welfare effects of monetary policy under the two growth engines (i.e., innovation versus capital accumulation). Finally, we simulate the transition dynamics of the R&D-based growth model to compute the complete welfare changes from reducing inflation.

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Paper provided by Institute of Economics, Academia Sinica, Taipei, Taiwan in its series IEAS Working Paper : academic research with number 10-A006.

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Length: 35 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:sin:wpaper:10-a006
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