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Inflation and innovation with a cash-in-advance constraint on human capital accumulation

Qichun He

Economics Letters, 2018, vol. 171, issue C, 14-18

Abstract: This note explores a novel channel – a cash-in-advance (CIA) constraint on endogenous human capital investment – through which monetary policy impacts growth and welfare in a scale-invariant Schumpeterian growth model. We find the following. An increase in the nominal interest rate leads to a decrease in human capital investment, which in turn reduces long-run growth and welfare. Calibration shows that long-run growth increases 0.61% by reducing the nominal interest rate from 9.9% (the sample mean of the U.S.) to 0%. The corresponding welfare gain is equivalent to a permanent increase in consumption of 15.98%. The growth and welfare effects depend on the strength of the CIA constraint on human capital investment. Our study has strong policy implications for developing countries where out-of-pocket money may be important for schooling.

Keywords: Monetary policy; Innovation; Cash-in-advance constraint on human capital investment; Economic growth; Welfare (search for similar items in EconPapers)
JEL-codes: O30 O40 E41 I2 (search for similar items in EconPapers)
Date: 2018
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