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R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY
Author(s) -
Chu Angus C.,
Cozzi Guido
Publication year - 2014
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12059
Subject(s) - economics , friedman rule , investment (military) , consumption (sociology) , constraint (computer aided design) , growth model , monetary economics , welfare , cash , liquidity constraint , market liquidity , social welfare , monetary policy , microeconomics , macroeconomics , market economy , mathematics , social science , geometry , sociology , politics , political science , law
R&D investment has well‐known liquidity problems, with potentially important consequences. In this study, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian growth model with cash‐in‐advance (CIA) constraints on R&D investment, consumption, and manufacturing. Our main results can be summarized as follows. Under the CIA constraints on R&D and consumption (the CIA constraint on manufacturing), an increase in the nominal interest rate decreases (increases) R&D and economic growth. 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.