R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY | Zendy

Chu Angus C. | Zendy; Cozzi Guido | Zendy

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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.

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