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A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights

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  • Chu, Angus C.
  • Lai, Ching-Chong
  • Liao, Chih-Hsing

Abstract

How do intellectual property rights that determine the market power of firms influence the effects of monetary policy on economic growth and social welfare? To analyze this question, we develop a monetary R&D-based growth model with elastic labor supply. We find that monetary expansion reduces growth and welfare through a decrease in labor supply that reduces R&D. Furthermore, a larger market power of firms strengthens these effects of monetary policy in the R&D model. In contrast, increasing the market power of firms dampens the growth and welfare effects of monetary policy in the AK model. Therefore, the market power of firms has drastically different implications on the welfare cost of inflation under the two growth engines (i.e., innovation versus capital accumulation). We also calibrate the two models using data in the US and the Euro Area to quantitatively evaluate and compare the welfare cost of inflation in the two economies. Finally, we simulate transition dynamics of the R&D model in order to compute the complete welfare changes from reducing inflation.

Suggested Citation

  • Chu, Angus C. & Lai, Ching-Chong & Liao, Chih-Hsing, 2010. "A tale of two growth engines: The interactive effects of monetary policy and intellectual property rights," MPRA Paper 30105, University Library of Munich, Germany, revised Apr 2011.
    • Handle: RePEc:pra:mprapa:30105
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    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. Qichun He, 2015. "A Monetary Variety-Expanding Growth Model with a Cash-in-Advance Constraint on Manufacturing," Economics Bulletin, AccessEcon, vol. 35(1), pages 571-579.
    4. 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(2), pages 507-524, May.
    5. 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.
    6. Gil, Pedro Mazeda & Iglésias, Gustavo & Guimarães, Luís, 2023. "Endogenous growth and monetary policy: How do interest-rate feedback rules shape nominal and real transitional dynamics?," Journal of International Money and Finance, Elsevier, vol. 138(C).
    7. Chu, Angus C. & Cozzi, Guido & Furukawa, Yuichi, 2013. "A Schumpeterian Analysis of Monetary Policy, Innovation and North-South Technology Transfer," Economics Working Paper Series 1319, University of St. Gallen, School of Economics and Political Science.
    8. Tatsuro Iwaisako, 2016. "Effects of Patent Protection on Optimal Corporate Income and Consumption Taxes in an R&D‐Based Growth Model," Southern Economic Journal, John Wiley & Sons, vol. 83(2), pages 590-608, October.
    9. Chang, Juin-Jen & Lai, Ching-Chong & Liao, Chih-Hsing, 2017. "Welfare Cost of Inflation: The Role of Price Markups and Increasing Returns to Production Specialization," MPRA Paper 77753, University Library of Munich, Germany.
    10. Chu, Angus C. & Ji, Lei, 2016. "Monetary Policy And Endogenous Market Structure In A Schumpeterian Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 20(5), pages 1127-1145, July.
    11. Hu, Ruiyang & Yang, Yibai & Zheng, Zhijie, 2023. "Patent protection and income inequality in a model with two growth engines," Economic Modelling, Elsevier, vol. 123(C).
    12. Angus C. Chu & Ching‐Chong Lai & Chih‐Hsing Liao, 2019. "A Tale of Two Growth Engines: Interactive Effects of Monetary Policy and Intellectual Property Rights," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(7), pages 2029-2052, October.
    13. Qichun He & Xin Yang & Heng-fu Zou, 2024. "Money, Growth, and Welfare in a Schumpeterian Model with Automation," CEMA Working Papers 640, China Economics and Management Academy, Central University of Finance and Economics.
    14. Chen, Ping-ho & Chu, Hsun & Lai, Ching-Chong, 2015. "Do R&D subsidies necessarily stimulate economic growth?," MPRA Paper 66061, University Library of Munich, Germany.
    15. Ken Tabata, 2021. "Patent protection and public capital accumulation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(1), pages 154-190, February.
    16. Suzuki, Keishun, 2020. "Patent Puzzle, Inflation, and Internal Financial Constraint," MPRA Paper 101937, University Library of Munich, Germany.
    17. Arawatari, Ryo & Hori, Takeo & Mino, Kazuo, 2018. "On the nonlinear relationship between inflation and growth: A theoretical exposition," Journal of Monetary Economics, Elsevier, vol. 94(C), pages 79-93.
    18. He, Qichun, 2023. "The inverted-U effect of inflation on growth: Cross-country evidence," Economic Modelling, Elsevier, vol. 128(C).
    19. Chen, Ping-Ho & Chu, Angus C. & Chu, Hsun & Lai, Ching-Chong, 2023. "Optimal capital taxation in an economy with innovation-driven growth," Macroeconomic Dynamics, Cambridge University Press, vol. 27(3), pages 635-668, April.
    20. 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.
    21. Angus C. Chu, 2022. "Inflation, innovation, and growth: A survey," Bulletin of Economic Research, Wiley Blackwell, vol. 74(3), pages 863-878, July.
    22. Daiki Maeda & Yuki Saito, 2020. "Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation," ISER Discussion Paper 1076, Institute of Social and Economic Research, Osaka University.
    23. Wei‐Neng Wang & Chia‐Ying Liu & Juin‐Jen Chang, 2021. "Tax policy implications for a two‐engine growing economy," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 979-1009, January.

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    More about this item

    Keywords

    economic growth; inflation; monetary policy; patent policy; R&D;
    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

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