R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY. (May 2014)

• Record Type: Journal Article
• Authors: Chu, Angus C.; Cozzi, Guido
• Is Part Of: International economic review. Volume 55:Number 2(2014:May)
• Page Start: 507
• Page End: 524
• Publication Date: 2014-05
• Subjects: Economics -- Periodicals; 330.05
• DOI: 10.1111/iere.12059
• Languages: English
• ISSNs: 0020-6598

Abstract

<abstract abstract-type="main"> <title> <x xml:space="preserve">Abstract</x> </title> <p>R&amp;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&amp;D investment, consumption, and manufacturing. Our main results can be summarized as follows. Under the CIA constraints on R&amp;D and consumption (the CIA constraint on manufacturing), an increase in the nominal interest rate decreases (increases) R&amp;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.</p> </abstract>