Monetary Policy in a Schumpeterian Growth Model with Vertical R&D Sectors

Chien‐yu Huang, Youchang Wu, Yibai Yang and Zhijie Zheng

Journal of Money, Credit and Banking, 2023, vol. 55, issue 6, 1569-1607

Abstract: We explore the growth and welfare effects of monetary policy in a Schumpeterian economy with cash‐in‐advance (CIA)‐constrained research and development (R&D) investment in both the upstream and downstream sectors. We show that the nominal interest rate can have an inverted‐U relation with economic growth due to its effects on labor allocations between manufacturing and R&D and between the R&D sectors. Furthermore, aggregate R&D overinvestment is generally sufficient but not necessary for the Friedman rule of zero nominal interest rates to be suboptimal. Calibrated using data from U.S. manufacturing firms, our model features a positive welfare‐maximizing nominal interest rate despite aggregate R&D underinvestment.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:55:y:2023:i:6:p:1569-1607

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