Inflation and Income Inequality in an Open-Economy Growth Model with Liquidity Constraints on R&D

This study explores the relationship between inflation and income inequality in an open-economy Schumpeterian growth model with heterogeneous households, firm-level innovation, and cash-in-advance constraints on R&D investment. We find that income inequality may monotonically increase with domestic inflation or display a U-shaped pattern, depending on the influence of a country’s technology growth on the global real interest rate. These predictions are supported by our quantitative model calibrated to the US and eurozone economies and empirical results using cross-country data.

Keywords: Income inequality; Inflation; Open economy; R&D; Financial constraints *

JEL Classification: D30; E41; O30; O40

Suggested Citation: Suggested Citation

Hu, Ruiyang and Wang, Jian and Yang, Yibai and Zheng, Zhijie, Inflation and Income Inequality in an Open-Economy Growth Model with Liquidity Constraints on R&D (December 2, 2022). Available at SSRN: https://ssrn.com/abstract=4396266 or http://dx.doi.org/10.2139/ssrn.4396266