International Knowledge Diffusion and Productivity Growth in a Cash-in-Advance Economy

Colin Davis and Ken-ichi Hashimoto

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

Abstract: This paper investigates how the cash-in-advance (CIA) constraints that firms face in production and innovation decisions affect the long-run relationship between monetary policy and innovation-based economic growth. Firms produce differentiated product varieties and invest in process innovation to reduce production costs. With imperfect knowledge diffusion across countries, the country with the greater share of industry has relatively productive firms. We find that when innovation has a stricter CIA requirement than production, an increase in the nominal interest rate in the country with the larger (smaller) share of industry reduces the industrial share of that country, thereby decreasing (increasing) the rate of productivity growth. We also examine the implications of improvements in knowledge diffusion for the optimal nominal interest rate policy of each country.

Date: 2025-03
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1278

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