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Health and Innovation in a Monetary Schumpeterian Growth Model

Qichun He

MPRA Paper from University Library of Munich, Germany

Abstract: This study explores a novel channel---endogenous health investment---through which monetary policy impacts growth and welfare. We use a scale-invariant Schumpeterian growth model with a cash-in-advance (CIA) constraint on R&D investment. We find that the effect of an increase in the nominal interest rate on long-run growth crucially depends on the form of the CIA constraint. When the CIA constraint does not apply to medical expenditure, long-run growth does not depend on the nominal interest rate. The result remains robust when health capital does not need medical expenditure to produce (i.e., health capital only needs leisure to produce). By contrast, when the CIA constraint applies to medical expenditure, an increase in the nominal interest rate leads to a decrease in R&D and health investment, which in turn reduces the long-run growth rates of technology and output. Nevertheless, welfare is always a decreasing function of the nominal interest rate, and the welfare loss is larger under the CIA constraint on medical expenditure. The results hold up with the health-in-the-utility function (HIU).

Keywords: Monetary policy; innovation; health; economic growth; welfare (search for similar items in EconPapers)
JEL-codes: E41 I15 O30 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hea and nep-mac
Date: 2018-03
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