IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v171y2018icp14-18.html
   My bibliography  Save this article

Inflation and innovation with a cash-in-advance constraint on human capital accumulation

Author

Listed:
  • He, Qichun

Abstract

This note explores a novel channel – a cash-in-advance (CIA) constraint on endogenous human capital investment – through which monetary policy impacts growth and welfare in a scale-invariant Schumpeterian growth model. We find the following. An increase in the nominal interest rate leads to a decrease in human capital investment, which in turn reduces long-run growth and welfare. Calibration shows that long-run growth increases 0.61% by reducing the nominal interest rate from 9.9% (the sample mean of the U.S.) to 0%. The corresponding welfare gain is equivalent to a permanent increase in consumption of 15.98%. The growth and welfare effects depend on the strength of the CIA constraint on human capital investment. Our study has strong policy implications for developing countries where out-of-pocket money may be important for schooling.

Suggested Citation

  • He, Qichun, 2018. "Inflation and innovation with a cash-in-advance constraint on human capital accumulation," Economics Letters, Elsevier, vol. 171(C), pages 14-18.
    • Handle: RePEc:eee:ecolet:v:171:y:2018:i:c:p:14-18
    DOI: 10.1016/j.econlet.2018.07.010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176518302647
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2018.07.010?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Rong Hai & James Heckman, 2017. "Inequality in Human Capital and Endogenous Credit Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 4-36, April.
    2. Cozzi, Guido & Giordani, Paolo E. & Zamparelli, Luca, 2007. "The refoundation of the symmetric equilibrium in Schumpeterian growth models," Journal of Economic Theory, Elsevier, vol. 136(1), pages 788-797, September.
    3. Robert E. Lucas Jr., 2015. "Human Capital and Growth," American Economic Review, American Economic Association, vol. 105(5), pages 85-88, May.
    4. Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
    5. Lance Lochner & Alexander Monge-Naranjo, 2012. "Credit Constraints in Education," Annual Review of Economics, Annual Reviews, vol. 4(1), pages 225-256, July.
    6. Angus Chu & Guido Cozzi & Chih-Hsing Liao, 2013. "Endogenous fertility and human capital in a Schumpeterian growth model," Journal of Population Economics, Springer;European Society for Population Economics, vol. 26(1), pages 181-202, January.
    7. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    8. Torben M Andersen, 2015. "Human Capital, Inequality and Growth," European Economy - Discussion Papers 007, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    9. Philippe Belley & Lance Lochner, 2007. "The Changing Role of Family Income and Ability in Determining Educational Achievement," Journal of Human Capital, University of Chicago Press, vol. 1(1), pages 37-89.
    10. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, vol. 9(3), pages 271-303, September.
    11. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2015. "Inflation, R&D and growth in an open economy," Journal of International Economics, Elsevier, vol. 96(2), pages 360-374.
    12. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi & Liao, Chih-Hsing, 2017. "Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms," European Economic Review, Elsevier, vol. 98(C), pages 392-409.
    13. He, Qichun, 2018. "Inflation and health in a Schumpeterian growth model: Theory and evidence," Economic Modelling, Elsevier, vol. 75(C), pages 159-168.
    14. Christopher Laincz & Pietro Peretto, 2006. "Scale effects in endogenous growth theory: an error of aggregation not specification," Journal of Economic Growth, Springer, vol. 11(3), pages 263-288, September.
    15. Angus C. Chu & Ching‐Chong Lai, 2013. "Money and the Welfare Cost of Inflation in an R&D Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 233-249, February.
    16. Chu, Angus C. & Cozzi, Guido & Lai, Ching-Chong & Liao, Chih-Hsing, 2013. "Monetary Policy, R&D and Economic Growth in an Open Economy," MPRA Paper 47364, University Library of Munich, Germany.
    17. Segerstrom, Paul S, 1998. "Endogenous Growth without Scale Effects," American Economic Review, American Economic Association, vol. 88(5), pages 1290-1310, December.
    18. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    19. He, Qichun & Zou, Heng-fu, 2016. "Does inflation cause growth in the reform-era China? Theory and evidence," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 470-484.
    20. He, Qichun, 2018. "Inflation and fertility in a Schumpeterian growth model: Theory and evidence1," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 113-126.
    21. Angus C. Chu & Guido Cozzi, 2014. "R&D And Economic Growth In A Cash‐In‐Advance Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55, pages 507-524, May.
    22. Rong Hai & James Heckman, 2017. "Inequality in Human Capital and Endogenous Credit Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 4-36, April.
    23. He, Qichun, 2018. "Inflation and Fertility in a Schumpeterian Growth Model: Theory and Evidence," MPRA Paper 85074, University Library of Munich, Germany.
    24. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Qichun He, 2020. "The COVID-19 Pandemic in a Monetary Schumpeterian Model," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 15(4), pages 626-641, December.
    2. Song, Wei & Yang, Yibai, 2024. "Monetary policy in a Schumpeterian economy with endogenous fertility and human capital accumulation," Journal of Macroeconomics, Elsevier, vol. 80(C).
    3. He, Qichun & Zhang, Zhixiang, 2019. "Inflation and Growth: An Inverted-U Relationship," MPRA Paper 97092, University Library of Munich, Germany.
    4. Reynaldo Senra Hodelin, 2022. "A Schumpeterian growth model on the effect of development banking on growth," Economic Change and Restructuring, Springer, vol. 55(2), pages 607-634, May.
    5. Sequeira, Tiago Neves, 2021. "Inflation, economic growth and education expenditure," Economic Modelling, Elsevier, vol. 99(C).
    6. Kyriaki I. Kafka & Pantelis C. Kostis & Panagiotis E. Petrakis, 2022. "Institutional Effects on Innovation and the Requirements for Structural Reforms," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 13(1), pages 211-235, March.
    7. He, Qichun, 2023. "The inverted-U effect of inflation on growth: Cross-country evidence," Economic Modelling, Elsevier, vol. 128(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. He, Qichun & Zhang, Zhixiang, 2019. "Inflation and Growth: An Inverted-U Relationship," MPRA Paper 97092, University Library of Munich, Germany.
    2. Angus C. Chu & Guido Cozzi & Haichao Fang & Yuichi Furukawa & Chih-Hsing Liao, 2019. "Innovation and Inequality in a Monetary Schumpeterian Model with Heterogeneous Households and Firms," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 141-164, October.
    3. Angus C. Chu, 2022. "Inflation, innovation, and growth: A survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 863-878, July.
    4. Lu, You-Xun, 2022. "Interactive effects of monetary policy and patent protection: The role of endogenous innovation size," Economic Modelling, Elsevier, vol. 113(C).
    5. He, Qichun, 2018. "Inflation and health in a Schumpeterian growth model: Theory and evidence," Economic Modelling, Elsevier, vol. 75(C), pages 159-168.
    6. He, Qichun, 2018. "Health and Innovation in a Monetary Schumpeterian Growth Model," MPRA Paper 85218, University Library of Munich, Germany.
    7. Qichun He, 2020. "The COVID-19 Pandemic in a Monetary Schumpeterian Model," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 15(4), pages 626-641, December.
    8. He, Qichun & Wang, Xilin, 2020. "Money, Human Capital and Endogenous Market Structure in a Schumpeterian Economy," MPRA Paper 104609, University Library of Munich, Germany.
    9. Angus C. Chu & Guido Cozzi & Haichao Fan & Yuichi Furukawa, 2021. "Inflation, Unemployment, and Economic Growth in a Schumpeterian Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(3), pages 874-909, July.
    10. He, Qichun, 2018. "Inflation and Fertility in a Schumpeterian Growth Model: Theory and Evidence," MPRA Paper 85074, University Library of Munich, Germany.
    11. He, Qichun, 2018. "Inflation and fertility in a Schumpeterian growth model: Theory and evidence1," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 113-126.
    12. He, Qichun, 2023. "The inverted-U effect of inflation on growth: Cross-country evidence," Economic Modelling, Elsevier, vol. 128(C).
    13. Song, Wei & Yang, Yibai, 2024. "Monetary policy in a Schumpeterian economy with endogenous fertility and human capital accumulation," Journal of Macroeconomics, Elsevier, vol. 80(C).
    14. Lu, You-Xun & Chen, Shi-kuan & Lai, Ching-chong, 2022. "Monetary Policy and Economic Growth in a Schumpeterian Model with Incumbents and Entrants," MPRA Paper 112177, University Library of Munich, Germany.
    15. Zheng, Zhijie & Huang, Chien-Yu & Wan, Xi, 2020. "Human Capital and Income Inequality in a Monetary Schumpeterian Growth Model," MPRA Paper 101912, University Library of Munich, Germany.
    16. Hu, Ruiyang & Yang, Yibai & Zheng, Zhijie, 2021. "Inflation, endogenous quality increment, and economic growth," Mathematical Social Sciences, Elsevier, vol. 114(C), pages 72-86.
    17. Zheng, Zhijie & Huang, Chien-Yu & Yang, Yibai, 2021. "Inflation And Growth: A Non-Monotonic Relationship In An Innovation-Driven Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 25(5), pages 1199-1226, July.
    18. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi & Liao, Chih-Hsing, 2017. "Inflation and economic growth in a Schumpeterian model with endogenous entry of heterogeneous firms," European Economic Review, Elsevier, vol. 98(C), pages 392-409.
    19. Zheng, Zhijie & Wan, Xi & Huang, Chien-Yu, 2023. "Inflation and income inequality in a Schumpeterian economy with heterogeneous wealth and skills," Economic Modelling, Elsevier, vol. 121(C).
    20. Qichun He & Heng-fu Zou, 2024. "Central Bank Independence and Inflation: Schumpeterian Theory and Evidence," Annals of Economics and Finance, Society for AEF, vol. 25(2), pages 463-500, November.

    More about this item

    Keywords

    Monetary policy; Innovation; Cash-in-advance constraint on human capital investment; Economic growth; Welfare;
    All these keywords.

    JEL classification:

    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • I2 - Health, Education, and Welfare - - Education

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:171:y:2018:i:c:p:14-18. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.