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Human Capital And Innovation In A Monetary Schumpeterian Growth Model

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  • Chu, Angus C.
  • Ning, Lei
  • Zhu, Dongming

Abstract

This study explores the growth and welfare effects of monetary policy in a scale-invariant Schumpeterian growth model with endogenous human capital accumulation. We model money demand via a cash-in-advance (CIA) constraint on research and development (R&D) investment. Our results can be summarized as follows. We find that an increase in the nominal interest rate leads to a decrease in R&D and human capital investment, which, in turn, reduces the long-run growth rates of technology and output. This result stands in stark contrast to the case of exogenous human capital accumulation in which the long-run growth rates of technology and output are independent of the nominal interest rate. Simulating the transitional dynamics, we find that the additional long-run growth effect under endogenous human capital accumulation amplifies the welfare effect of monetary policy. Decreasing the nominal interest rate from 10% to 0% leads to a welfare gain that is equivalent to a permanent increase in consumption of 2.82% (2.38%) under endogenous (exogenous) human capital accumulation.

Suggested Citation

  • 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.
    • Handle: RePEc:cup:macdyn:v:23:y:2019:i:05:p:1875-1894_00
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    6. Afonso, Oscar, 2023. "Inflation, technological-knowledge bias, and wages," Research in Economics, Elsevier, vol. 77(1), pages 91-103.
    7. Sequeira, Tiago Neves, 2021. "Inflation, economic growth and education expenditure," Economic Modelling, Elsevier, vol. 99(C).
    8. 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.
    9. Daiki Maeda & Yuki Saito, 2020. "Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation," ISER Discussion Paper 1076r, Institute of Social and Economic Research, Osaka University, revised Jun 2020.
    10. Afonso, Oscar & Gil, Pedro Mazeda, 2024. "Territorial comparative advantage, wage inequality, and monetary policy in the global world," Journal of International Money and Finance, Elsevier, vol. 143(C).
    11. Angus C. Chu, 2022. "Inflation, innovation, and growth: A survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 863-878, July.
    12. Sanchez-Carrera Edgar J. & Ille Sebastian & Travaglini Giuseppe, 2021. "Macrodynamic Modeling of Innovation Equilibria and Traps," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(2), pages 659-694, June.
    13. Daiki Maeda & Yuki Saito, 2020. "Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation," ISER Discussion Paper 1076, Institute of Social and Economic Research, Osaka University.
    14. Oscar Afonso & Pedro G. Lima, 2023. "Effects of monetary policy on the skill premium and the growth rate in a directed technical change model with heterogeneous cash‐in‐advance constraints," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 4020-4036, October.
    15. Oscar Afonso & Rosa Forte, 2023. "How powerful are fiscal and monetary policies in a directed technical change model with humans and robots?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 3008-3032, July.
    16. He, Qichun, 2023. "The inverted-U effect of inflation on growth: Cross-country evidence," Economic Modelling, Elsevier, vol. 128(C).
    17. Afonso, Oscar & Pinho, Mafalda, 2022. "How to reverse a negative asymmetric labor productivity shock in the European Union? A directed technical change analysis with fiscal and monetary policies," Mathematical Social Sciences, Elsevier, vol. 116(C), pages 47-67.
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    More about this item

    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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