Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors

36 Pages Posted: 20 Sep 2021

See all articles by Chien‐Yu Huang

Chien‐Yu Huang

Nanjing Audit University

Youchang Wu

University of Oregon - Lundquist College of Business

Yibai Yang

University of Macau

Zhijie Zheng

Beijing Normal University - Zhuhai Campus

Date Written: September 16, 2021

Abstract

We explore the growth and welfare effects of monetary policy in a two-sector Schumpeterian economy with cash-in-advance (CIA) constrained R&D investment in both sectors. We show that a nominal interest rate increase generates two effects on equilibrium labor allocation: a manufacturing-R&D-reallocation effect and a cross-R&D-sector effect. The former reduces economic growth by shifting labor from R&D to production, whereas the latter can enhance it by shifting labor from the less productive R&D sector to the more productive one. From the welfare perspective, we show that unless the high productivity R&D sector is severely more CIA-constrained than the low productivity one, aggregate R&D overinvestment is sufficient but not necessary for the Friedman rule of monetary policy to be suboptimal. Our benchmark parameterization suggests that a positive nominal interest rate is optimal despite that it exacerbates the aggregate R&D underinvestment problem.

Keywords: CIA constraint, Endogenous growth, Monetary policy, R&D Creative destruction

JEL Classification: O30, O40, E41

Suggested Citation

Huang, Chien‐Yu and Wu, Youchang and Yang, Yibai and Zheng, Zhijie, Monetary Policy in a Schumpeterian Growth Model with Two R&D Sectors (September 16, 2021). Available at SSRN: https://ssrn.com/abstract=3924799 or http://dx.doi.org/10.2139/ssrn.3924799

Chien‐Yu Huang

Nanjing Audit University

86 Yushan W Rd
Pukou, 210017
China

Youchang Wu

University of Oregon - Lundquist College of Business ( email )

1280 University of Oregon
Eugene, OR 97403
United States

HOME PAGE: http://www.youchangwu.com

Yibai Yang (Contact Author)

University of Macau ( email )

Macau
China

Zhijie Zheng

Beijing Normal University - Zhuhai Campus ( email )

18 Jinfeng Rd, Xiangzhou Qu
Guangdong Sheng
Zhuhai Shi, Guangdong
China

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