Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms
Angus Chu (),
Guido Cozzi (),
Yuichi Furukawa () and
Chih-Hsing Liao ()
European Economic Review, 2017, vol. 98, issue C, 392-409
This study develops a Schumpeterian growth model with endogenous entry of heterogeneous firms to analyze the effects of monetary policy on economic growth via a cash-in-advance constraint on R&D investment. Our results can be summarized as follows. In the special case of a zero entry cost, an increase in the nominal interest rate decreases R&D, the arrival rate of innovations and economic growth as in previous studies. However, in the general case of a positive entry cost, an increase in the nominal interest rate affects the distribution of innovations that are implemented and would have an inverted-U effect on economic growth if the entry cost is sufficiently large. We also calibrate the model to aggregate data of the US economy and find that the growth-maximizing inflation rate is about 3%, which is consistent with recent empirical estimates. Finally, we also explore the welfare effects of inflation and consider a number of extensions to the benchmark model.
Keywords: Monetary policy; Inflation; Economic growth; Heterogeneous firms (search for similar items in EconPapers)
JEL-codes: O30 O40 E41 (search for similar items in EconPapers)
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Working Paper: Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:98:y:2017:i:c:p:392-409
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