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R&D and Economic Growth in a Cash-in-Advance Economy
Series
Economics Working Paper Series (1308)
Type
discussion paper
Date Issued
2013-03
Author(s)
Chu, Angus
Abstract
R&D investment has well-known liquidity problems, with potentially important consequences. In this paper, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian model with cash-in-advance (CIA) constraints on consumption, R&D investment, and manufacturing. Our results are as follows. Under the CIA constraints on consumption and R&D (manufacturing), an increase in the nominal interest rate would decrease (increase) R&D and economic growth. So long as the effect of cash requirements in R&D is relatively more important than in manufacturing, the nominal interest rate would have an overall negative effect on R&D and economic growth as documented in recent empirical studies. 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. Specifically, we find that the suboptimality or optimality of Friedman rule is closely related to a seemingly unrelated issue that is the overinvestment versus underinvestment of R&D in the market economy, and this result is robust to alternative versions of the Schumpeterian model.
Language
English
Keywords
Economic growth
R&D
quality ladders
cash-in-advance
monetary policy
Friedman rule.
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Refereed
No
Publisher
University of St.Gallen
Publisher place
St.Gallen
Number
1308
Start page
25
Subject(s)
Eprints ID
221846
File(s)