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Research Highlights

Money and the Welfare Cost of Inflation in an R&D Growth Model (with Angus C. Chu, published in JOURNAL OF MONEY, CREDIT AND BANKING in 2013)

  • Author 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 US 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.
  • Link http://onlinelibrary.wiley.com/doi/10.1111/j.1538-4616.2012.00568.x/abstract(Open New Window)