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Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms

Angus Chu (), Guido Cozzi (), Yuichi Furukawa () and Chih-Hsing Liao ()

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: monetary policy; inflation; economic growth; heterogeneous firms (search for similar items in EconPapers)
JEL-codes: E41 O3 O4 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-gro, nep-ino, nep-mac and nep-mon
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https://mpra.ub.uni-muenchen.de/77543/1/MPRA_paper_77543.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/79555/1/MPRA_paper_79555.pdf revised version (application/pdf)

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