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Inflation, endogenous quality increment, and economic growth

Author

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  • Zheng, Zhijie
  • Hu, Ruiyang
  • Yang, Yibai

Abstract

This study explores the effects of monetary policy in a Schumpeterian growth model with endogenous quality increment and distinct cash-in-advance (CIA) constraints on consumption, manufacturing and R&D investment. Our results are summarized as follows. When the CIA constraint is solely on consumption expenditure, an increase in the nominal interest rate may stifle economic growth by lowering the arrival rate of innovation and stimulate it at the same time by raising the size of quality increment. An additional CIA constraint on manufacturing weakens the growth-retarding effect and enhances the growth-promoting effect, whereas an additional CIA constraint on R&D investment strengthens only the negative growth effect. The quantitative analysis finds that the relationship between inflation and growth can be either monotonically decreasing or hump-shaped, but the welfare effect of inflation is always negative.

Suggested Citation

  • Zheng, Zhijie & Hu, Ruiyang & Yang, Yibai, 2021. "Inflation, endogenous quality increment, and economic growth," MPRA Paper 106989, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106989
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Monetary Policy; Economic Growth; R&D; Endogenous Quality Increment;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • 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

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