Monetary policy and endogenous market structure in a schumpeterian economy

Angus Chu and Ji Lei

MPRA Paper from University Library of Munich, Germany

Abstract: In this study, we develop a monetary Schumpeterian growth model with endogenous market structure (EMS) to explore the effects of monetary policy on the number of firms, �firm size, economic growth and social welfare. EMS leads to richer implications and different results from previous studies in which market structure is exogenous. In the short run, a higher nominal interest rate leads to lower growth rates of innovation, output and consumption and also smaller �rm size due to a reduction in labor supply. In the long run, an increase in the nominal interest rate reduces the equilibrium number of �firms but has no effect on economic growth and fi�rm size because of a scale-invariant property of the model as a result of entry and exit of fi�rms. Although monetary policy has no long-run effect on economic growth, an increase in the nominal interest rate permanently reduces the levels of output, consumption and employment. Taking into account transition dynamics, we �nd that social welfare is decreasing in the nominal interest rate. Given that a zero nominal interest rate maximizes welfare, Friedman rule is optimal in this economy.

Keywords: monetary policy; economic growth; R&D; endogenous market structure (search for similar items in EconPapers)
JEL-codes: E41 O30 O40 (search for similar items in EconPapers)
Date: 2012-08-27
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ino and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: MONETARY POLICY AND ENDOGENOUS MARKET STRUCTURE IN A SCHUMPETERIAN ECONOMY (2016)
Working Paper: Monetary policy and endogenous market structure in a Schumpeterian economy (2012)
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