Where Liquidity is Scarce: The Spirit of Capitalism and the Growth Effects of Monetary Policy

Klaus Prettner and Martin Stojanovikj

No 403, Department of Economics Working Paper Series from WU Vienna University of Economics and Business

Abstract: This paper offers a distinct standpoint on the growth effects of monetary policy in the presence of a spirit of capitalism, that is, an independent gratification conveyed through asset accumulation. Using a monetary Schumpeterian growth model with an endogenous market structure, we generalize the main insights of previous literature. In particular, we show that a higher nominal interest rate can have a negative effect on steady-state economic growth, challenging the result of long-run neutrality of monetary policy. The direction of the effect is governed not only by the presence of the spirit of capitalism as such, but by where liquidity is constrained. When the cash-in-advance constraint binds on the financing of market entry rather than on paying for consumption, a higher nominal interest rate raises the cost of creating startups and depresses long-run economic growth. We further show that welfare on the balanced growth path is decreasing in the nominal interest rate, so the Friedman rule is optimal in such an economic setting. A structural calibration to the United States economy, disciplining liquidity exposures with independent evidence on startup finance and transaction-money holdings instead of targeting growth responses to monetary policy, places the economy comfortably in the region in which a higher nominal interest rate lowers long- run growth.

Keywords: Spirit of capitalism; Monetary policy; Economic growth; Endogenous market structure (search for similar items in EconPapers)
Date: 2026-11
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