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Money and the Welfare Cost of Inflation in an R&D-Growth Model

Angus Chu () and Ching-chong Lai

No 10-A003, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: This study analyzes the effects of inflation on R&D and innovation-driven growth. In the theoretical section, we incorporate money demand into a quality-ladder model with elastic labor supply and derive the following results. If the elasticity of substitution between consumption and the real money balance is less (greater) than unity, then R&D and output growth are decreasing (increasing) in inflation. If either labor supply is inelastic or the elasticity of substitution between consumption and the real money balance is unity, then social welfare monotonically increases as the nominal interest rate approaches zero (i.e. the Friedman rule). Quantitatively, decreasing inflation in the US to achieve price stability improves welfare (equivalent to a permanent increase in consumption of at least 0.5%). In the empirical section, we use cross-country data to establish a negative and statistically significant relationship between inflation and R&D.

Keywords: economic growth; inflation; money; R&D; economic growth; inflation; money; R&D (search for similar items in EconPapers)
JEL-codes: E41 O41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2010-03
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Journal Article: Money and the Welfare Cost of Inflation in an R&D Growth Model (2013) Downloads
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