Monetary Policy in a Schumpeterian Economy with Endogenous Fertility and Human Capital Accumulation

38 Pages Posted: 28 Nov 2023 Last revised: 30 Jan 2024

See all articles by Wei Song

Wei Song

University of Macau

Yibai Yang

University of Macau - Department of Economics

Date Written: January 29, 2024

Abstract

This study investigates the growth and welfare effects of monetary policy in a Schumpeterian economy featuring cash-in-advance (CIA) constraints and two engines of growth: innovation from R&D and human capital accumulation from endogenous fertility. Our theoretical analysis considers the cases of various CIA constraints. When the CIA constraint is only on consumption, higher inflation retards economic growth by weakening human capital accumulation. When the CIA constraint is only on R&D, higher inflation would generate a negative or U-shaped effect on economic growth, depending on the interplay between inflationary effects on innovation and human capital accumulation. When the CIA constraint is only on manufacturing, the growth effect of inflation could be positive (negative) if the positive growth effect from technological progress dominates (is dominated by) the negative effect from human capital accumulation. Our quantitative analysis finds a generally negative inflation-growth relationship in the calibrated economy. Moreover, the welfare effect of inflation is also negative, implying that the Friedman rule is optimal.

Keywords: Monetary policy; Economic growth; Fertility; Human capital; R&D

JEL Classification: O31; O42; J10

Suggested Citation

Song, Wei and Yang, Yibai, Monetary Policy in a Schumpeterian Economy with Endogenous Fertility and Human Capital Accumulation (January 29, 2024). Available at SSRN: https://ssrn.com/abstract=4634114 or http://dx.doi.org/10.2139/ssrn.4634114

Wei Song

University of Macau ( email )

P.O. Box 3001
Macau

Yibai Yang (Contact Author)

University of Macau - Department of Economics ( email )

Macau
China

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