Money, growth, and welfare in a Schumpeterian model with the spirit of capitalism

Abstract

According to Schumpeter (1934), entrepreneurs are driven to innovate not just for the fruits of success but also for success itself. This description of entrepreneurship echoes Weber's (1904-05, German; 1958) description of the “spirit of capitalism,” which states that people enjoy the accumulation of wealth regardless of its effect on smoothing consumption. This paper explores the implications of the spirit of capitalism on monetary policy, growth, and welfare in a Schumpeterian growth model. Different from the existing literature, we show that money is not superneutral in the long run and it could promote economic growth when the spirit of capitalism is strong. Furthermore, we show the optimal nominal interest rate decreases with the strength of the spirit of capitalism, potentially supporting a negative interest rate.