Angus C. Chu, Guido Cozzi, Yuichi Furukawa and Chih-Hsing Liao. "Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms".European Economic Review, 2017.
Inflation and Economic Growth in a Schumpeterian Model with Endogenous Entry of Heterogeneous Firms
Angus C. Chu
China Center for Economic Studies, School of Economics, Fudan University.
Department of Economics, University of St. Gallen.
School of Economics, Chukyo University.
Department of Economics, Chinese Culture University.
This study develops a Schumpeterian 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 Ramp;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 Ramp;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.
Keywords: monetary policy; inflation; economic growth; heterogeneous firms