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Monetary Policy, R&D and Economic Growth in an Open Economy

Angus Chu, Guido Cozzi, Ching-chong Lai and Chih-Hsing Liao

No 1315, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: This study analyzes the growth and welfare effects of monetary policy in a two-country Schumpeterian growth model with cash-in-advance constraints on consumption and R&D investment. We find that an increase in the domestic nominal interest rate decreases domestic R&D investment and the growth rate of domestic technology. Given that economic growth in a country depends on both domestic and foreign technologies, an increase in the foreign nominal interest rate also decreases economic growth in the domestic economy. When each government conducts its monetary policy unilaterally to maximize the welfare of only domestic households, the Nash-equilibrium nominal interest rates are generally higher than the optimal nominal interest rates chosen by cooperative governments who maximize the welfare of both domestic and foreign households. This difference is caused by a cross-country spillover effect of monetary policy arising from trade in intermediate goods. Under the CIA constraint on consumption (R&D investment), a larger market power of firms decreases (increases) the wedge between the Nash-equilibrium and optimal nominal interest rates. We also calibrate the two-country model to data in the Euro Area and the UK and find that the cross-country welfare effects of monetary policy are quantitatively significant.

Keywords: Monetary policy; economic growth; R&D; trade in intermediate goods (search for similar items in EconPapers)
JEL-codes: E41 F43 O30 O40 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2013-06
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ino and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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