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HUMAN CAPITAL AND INNOVATION IN A MONETARY SCHUMPETERIAN GROWTH MODEL

Published online by Cambridge University Press:  10 August 2017

Angus C. Chu ,
Lei Ning  and
Dongming Zhu
Angus C. Chu
Affiliation:
Fudan University
Lei Ning*
Affiliation:
Shanghai University of Finance and Economics
Dongming Zhu
Affiliation:
Shanghai University of Finance and Economics
*
Address correspondence to: Lei Ning, Institute for Advanced Research, Shanghai University of Finance and Economics, Shanghai, China; e-mail: ninglei107@gmail.com.
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Abstract

This study explores the growth and welfare effects of monetary policy in a scale-invariant Schumpeterian growth model with endogenous human capital accumulation. We model money demand via a cash-in-advance (CIA) constraint on research and development (R&D) investment. Our results can be summarized as follows. We find that an increase in the nominal interest rate leads to a decrease in R&D and human capital investment, which, in turn, reduces the long-run growth rates of technology and output. This result stands in stark contrast to the case of exogenous human capital accumulation in which the long-run growth rates of technology and output are independent of the nominal interest rate. Simulating the transitional dynamics, we find that the additional long-run growth effect under endogenous human capital accumulation amplifies the welfare effect of monetary policy. Decreasing the nominal interest rate from 10% to 0% leads to a welfare gain that is equivalent to a permanent increase in consumption of 2.82% (2.38%) under endogenous (exogenous) human capital accumulation.

Keywords

Monetary PolicyEconomic GrowthR&DHuman Capital
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 5 , July 2019 , pp. 1875 - 1894
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

Chu gratefully acknowledges the financial support from the Thousand Talents Program by the Shanghai Municipal Government. Ning is grateful to the support by the Fundamental Research Funds for the Central Universities (SUFE) (2017110133) and China Postdoctoral Science Foundation (Grant No. 2017M611515). Zhu acknowledges the financial support from the Key Laboratory of Mathematical Economics at Shanghai University of Finance and Economics. The usual disclaimer applies.

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