A Monetary Variety-Expanding Growth Model with a Cash-in-Advance Constraint on Manufacturing

Qichun He

Economics Bulletin, 2015, vol. 35, issue 1, 571-579

Abstract: We highlight one difference in predictions between Romer's expanding variety model and the Schumpeterian quality-ladder model, when there exists a cash-in-advance (CIA) constraint on manufacturing. In the expanding variety model, a higher nominal interest rate decreases growth, and a negative nominal interest rate would be socially optimal. In contrast, in the quality-ladder model, a higher nominal interest rate increases growth. In the quality-ladder model, when the step-size of innovation is small (i.e., there may be R&D over-investment when the business-stealing effect dominates), the optimal nominal interest rate would be negative. When the step-size of innovation is large, the optimal nominal interest rate would be positive.

Keywords: Economic growth; expanding variety model; quality-ladder model; cash-in-advance; Friedman Rule (search for similar items in EconPapers)
JEL-codes: E4 O3 (search for similar items in EconPapers)
Date: 2015-03-12
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Citations: View citations in EconPapers (8)

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