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Money and the Welfare Cost of Inflation in an R&D Growth Model
Author(s) -
CHU ANGUS C.,
LAI CHINGCHONG
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00568.x
Subject(s) - economics , inflation (cosmology) , consumption (sociology) , monetary economics , welfare , money supply , elasticity of substitution , price elasticity of demand , monetary policy , keynesian economics , macroeconomics , microeconomics , production (economics) , market economy , social science , physics , sociology , theoretical physics
This study analyzes the effects of inflation on R&D and innovation‐driven growth. In the theoretical section, we incorporate money demand into a quality‐ladder model with elastic labor supply and derive the following result. If the elasticity of substitution between consumption and the real money balance is less (greater) than unity, then R&D and the growth rate of output would be decreasing (increasing) in the growth rate of money supply. Quantitatively, decreasing inflation in the U.S. to achieve price stability improves social welfare, and the welfare gain is equivalent to at least 0.5% of annual consumption. In the empirical section, we use cross‐country data to establish a negative and statistically significant relationship between inflation and R&D.