Abstract
Abstract This article explores the effects of monetary policy (inflation) in a Schumpeterian growth model with an endogenous market structure and distinct cash (or cash-in-advance, CIA) constraints on consumption, production, and two types of R&D investment—quality-improving and variety-expanding R&D. We show that the relationship between inflation and growth is negative if quality-improving R&D (incumbent) is subject to the CIA constraint, but positive if variety-expanding R&D (entrant) is subject to the CIA constraint. Inflation has no effect on growth as consumption or production is subject to the CIA constraint. In addition, the firm size may either increase or decrease in response to inflation depending on which type of R&D is constrained by cash. With all CIA constraints properly imposed, a likely scenario in our numerical analysis shows that a rise in inflation leads the growth rate to exhibit a decrease in the short run but an increase in the long run. Moreover, our welfare analysis shows that Friedman’s rule, in general, is not socially optimal.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.