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Monetary Policy, Financial Frictions, and Heterogeneous R&D Firms in an Endogenous Growth Model *
Author(s) -
Hori Takeo
Publication year - 2020
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12387
Subject(s) - economics , homogeneous , constraint (computer aided design) , endogenous growth theory , friedman rule , productivity , welfare , nominal interest rate , monetary economics , monetary policy , interest rate , cash , finance , macroeconomics , real interest rate , mathematics , market economy , geometry , combinatorics , economic growth , human capital
Motivated by empirical facts, I construct an endogenous growth model in which heterogeneous research and development (R&D) firms are financially constrained and use cash to finance R&D investments. I also examine the optimal monetary policy. The effects of financial constraint crucially depend on whether R&D firms are homogeneous or heterogeneous regarding R&D productivity. If R&D firms are homogeneous, then the zero nominal interest rate (i.e., the Friedman rule) is always optimal under severe financial constraint. Heterogeneity in R&D productivity leads to the opposite result. With heterogeneity, severe financial constraint makes the strictly positive nominal interest rate welfare‐improving under a plausible condition.