Monetary Policy in a Schumpeterian Growth Model with Vertical R&D Sectors
Journal of Money, Credit and Banking, Forthcoming
61 Pages Posted: 20 Sep 2021 Last revised: 5 Jan 2022
Date Written: January 4, 2022
We explore the growth and welfare effects of monetary policy in a Schumpeterian economy with cash-in-advance (CIA) constrained R&D investment in both the upstream and downstream sectors. We show that the nominal interest rate can have an inverted-U relation with economic growth due to its effects on labor allocations between manufacturing and R&D and between the R&D sectors. Furthermore, aggregate R&D overinvestment is generally sufficient but not necessary for the Friedman rule of zero nominal interest rates to be suboptimal. Calibrated using data from US manufacturing firms, our model features a positive welfare-maximizing nominal interest rate despite aggregate R&D underinvestment.
Keywords: Monetary policy; Zero interest rate; Endogenous growth; R&D; Creative destruction
JEL Classification: O30, O40, E41
Suggested Citation: Suggested Citation