R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY

Angus C. Chu · Guido Cozzi

139 citations0/0 files storedInternational Economic Review

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Economic theories and models Monetary Policy and Economic Impact Economic Growth and Productivity

Abstract

R&D investment has well‐known liquidity problems, with potentially important consequences. In this study, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian growth model with cash‐in‐advance (CIA) constraints on R&D investment, consumption, and manufacturing. Our main results can be summarized as follows. Under the CIA constraints on R&D and consumption (the CIA constraint on manufacturing), an increase in the nominal interest rate decreases (increases) R&D and economic growth. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model.

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References

1990Endogenous Technological Change 1989Endogenous Technological Change 1992A Model of Growth Through Creative Destruction 1990A Model of Growth Through Creative Destruction 1989Quality Ladders in the Theory of Growth 1965Money and Economic Growth 1994R & D and Internal Finance: A Panel Study of Small Firms in High-Tech Industries 1990Optimal Patent Length and Breadth

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