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R&D and Economic Growth in a Cash-in-Advance Economy

Angus Chu () and Guido Cozzi ()

No 1308, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: R&D investment has well-known liquidity problems, with potentially important consequences. In this paper, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian model with cash-in-advance (CIA) constraints on consumption, R&D investment, and manufacturing. Our results are as follows. Under the CIA constraints on consumption and R&D (manufacturing), an increase in the nominal interest rate would decrease (increase) R&D and economic growth. So long as the effect of cash requirements in R&D is relatively more important than in manufacturing, the nominal interest rate would have an overall negative effect on R&D and economic growth as documented in recent empirical studies. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model. Specifically, we find that the suboptimality or optimality of Friedman rule is closely related to a seemingly unrelated issue that is the overinvestment versus underinvestment of R&D in the market economy, and this result is robust to alternative versions of the Schumpeterian model.

Keywords: Economic growth; R&D; quality ladders; cash-in-advance; monetary policy; Friedman rule (search for similar items in EconPapers)
JEL-codes: O30 O40 E41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-ino
Date: 2013-03
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Related works:
Journal Article: R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY (2014) Downloads
Working Paper: R&D and economic growth in a cash-in-advance economy (2012) Downloads
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