Journal
EUROPEAN ECONOMIC REVIEW
Volume 98, Issue -, Pages 392-409Publisher
ELSEVIER SCIENCE BV
DOI: 10.1016/j.euroecorev.2017.07.006
Keywords
Monetary policy; Inflation; Economic growth; Heterogeneous firms
Categories
Funding
- Thousand Talents Program by the Shanghai Municipal Government
- [26780126]
- [16H03612]
- Grants-in-Aid for Scientific Research [16H03612, 26780126] Funding Source: KAKEN
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This study develops a Schurfipeterian growth model with endogenous entry of heterogeneous firms to analyze the effects of monetary policy on economic growth via a cash-in advance constraint on R&D investment. Our results can be summarized as follows. In the special case of a zero entry cost, an increase in the nominal interest rate decreases R&D, the arrival rate of innovations and economic growth as in previous studies. However, in the general case of a positive entry cost, an increase in the nominal interest rate affects the distribution of innovations that are implemented and would have an inverted-U effect on economic growth if the entry cost is sufficiently large. We also calibrate the model to aggregate data of the US economy and find that the growth-maximizing inflation rate is about 3%, which is consistent with recent empirical estimates. Finally, we also explore the welfare effects of inflation and consider a number of extensions to the benchmark model. (C) 2017 Elsevier B.V. All rights reserved.
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