Money, Growth, and Welfare in a Schumpeterian Model with Automation

Qichun He, Xin Yang () and Heng-Fu Zou ()
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Xin Yang: China Economics and Management Academy, Central University of Finance and Economics

No 640, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: This paper explores the growth and welfare ects of monetary policy in a Schumpeterian vertical innovation model with automation. Money is introduced into the model via the cash-in-advance (CIA) constraints on consumption, production, automation and vertical innovation. We find that the relative strength of the cash constraints on automation and vertical innovations is crucial. If the CIA constraint is stronger (weaker) for automation, a higher nominal interest rate will lead to an increase (a decrease) in the amount of high-skilled labor allocated to vertical innovation. As a result, the automation level will decline (rise), but the vertical innovation and thereby aggregate economic growth will be faster (slower). We calibrate the model to the US economy and find a stronger cash constraint on automation. Our quantitative analysis shows that rising nominal interest rates are detrimental to automation but favorable to growth. In addition, higher nominal interest rates improve the welfare of dierent households and the aggregate welfare. As an empirical test, we find a signifficant, negative effect of the nominal interest rate on automation using cross-country panel data, consistent with our model prediction.

Keywords: Monetary policy; Automation; Cash-in-advance; Schumpeterian model (search for similar items in EconPapers)
JEL-codes: E42 O42 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2024-07
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-gro, nep-mon and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:640

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