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

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: January 4, 2022

Abstract

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

Huang, Chien‐Yu and Wu, Youchang and Yang, Yibai and Zheng, Zhijie, Monetary Policy in a Schumpeterian Growth Model with Vertical R&D Sectors (January 4, 2022). Journal of Money, Credit and Banking, Forthcoming, 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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