Innovation and Growth with Financial, and Other, Frictions

31 Pages Posted: 6 Feb 2017

See all articles by Jonathan Chiu

Jonathan Chiu

Bank of Canada

Cesaire Meh

Government of Canada - Bank of Canada

Randall Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: February 2017

Abstract

The generation of ideas and their implementation are crucial for economic performance. We study this in a model of endogenous growth, where productivity increases with innovation and where the exchange of ideas (technology transfer) allows those with comparative advantage to implement them. Search, bargaining, and commitment frictions impede the idea market, however, reducing efficiency and growth. We characterize optimal policies involving subsidies to innovative and entrepreneurial activity, given both knowledge and search externalities. The role of liquidity is discussed. We show intermediation helps by financing more transactions with fewer assets and, more subtly, by ameliorating holdup problems. We also discuss some evidence.

Suggested Citation

Chiu, Jonathan and Meh, Cesaire and Wright, Randall D., Innovation and Growth with Financial, and Other, Frictions (February 2017). International Economic Review, Vol. 58, Issue 1, pp. 95-125, 2017. Available at SSRN: https://ssrn.com/abstract=2911308 or http://dx.doi.org/10.1111/iere.12210

Jonathan Chiu (Contact Author)

Bank of Canada ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Cesaire Meh

Government of Canada - Bank of Canada

234 Wellington Street
Ontario, K1A 0G9
Canada

Randall D. Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-3860 (Phone)

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

90 Hennepin Avenue
Minneapolis, MN 55480
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1
Abstract Views
140
PlumX Metrics