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Money and the Welfare Cost of Inflation in an R&D Growth Model

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  • ANGUS C. CHU
  • CHING‐CHONG LAI

Abstract

This study analyzes the effects of inflation on R&D and innovation‐driven growth. In the theoretical section, we incorporate money demand into a quality‐ladder model with elastic labor supply and derive the following result. If the elasticity of substitution between consumption and the real money balance is less (greater) than unity, then R&D and the growth rate of output would be decreasing (increasing) in the growth rate of money supply. Quantitatively, decreasing inflation in the U.S. to achieve price stability improves social welfare, and the welfare gain is equivalent to at least 0.5% of annual consumption. In the empirical section, we use cross‐country data to establish a negative and statistically significant relationship between inflation and R&D.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jmoncb:v:45:y:2013:i:1:p:233-249
    DOI: 10.1111/j.1538-4616.2012.00568.x
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    More about this item

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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