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: E41 O30 O40 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2013-03
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-ino
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://ux-tauri.unisg.ch/RePEc/usg/econwp/EWP-1308.pdf (application/pdf)

Related works:
Journal Article: R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY (2014)
Working Paper: R&D and economic growth in a cash-in-advance economy (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:usg:econwp:2013:08

Access Statistics for this paper

More papers in Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science Contact information at EDIRC.
Bibliographic data for series maintained by ().