R&D AND ECONOMIC GROWTH IN A CASH‐IN‐ADVANCE ECONOMY

R&D investment has well‐known liquidity problems, with potentially important consequences. In this study, we analyze the effects of monetary policy on economic growth and social welfare in a Schumpeterian growth model with cash‐in‐advance (CIA) constraints on R&D investment, consumption, and manufacturing. Our main results can be summarized as follows. Under the CIA constraints on R&D and consumption (the CIA constraint on manufacturing), an increase in the nominal interest rate decreases (increases) R&D and economic growth. We also analyze the optimality of Friedman rule and find that Friedman rule can be suboptimal due to a unique feature of the Schumpeterian model.     

Occupational choice and entrepreneurship: effects of R&D subsidies on economic growth

Most R&D-based growth models fail to explicitly account for the role of entrepreneurs in economic growth. By contrast, this study accounts for this factor and constructs an overlapping-generations model that includes entrepreneurial innovation and the occupational choice of becoming an entrepreneur or a worker. For the role of entrepreneurs, even a policy intended to encourage innovation can negatively affect economic growth. For the effect of such policies, I focus on the role of R&D subsidies. I show that while R&D subsidies promote entrepreneurs’ R&D activities, they increase workers’ wages by boosting labor demand. Thus, it is more attractive to be a worker, which reduces the number of entrepreneurs. Subsidies can have both a negative and positive effect on growth, which results in an inverted U-shaped relationship between R&D subsidies and growth. In addition, a growth-maximizing R&D subsidy rate exists, although this rate is too high to maximize the welfare level of any one generation. When individuals are heterogeneous in their abilities, R&D subsidies reduce intra-generational inequalities.     

The impact of health sector on R&D,economic growth and wages

We extend the existing R&D growth literature by focusing on the short-, medium-, long-run effects of the health sector on R&D intensity, economic growth and wages, and by considering 21 OECD countries between 1991 and 2008. We show that: (i) there is a unique and stable steady state; (ii) an increase in health-labour share in skilled population has no effect on growth, but affects negatively (positively) the R&D intensity (the skill premium); (iii) Anglo–Saxons countries have the lowest health-labour share in skilled-labour population, and Nordic countries have the lowest skill premium and the highest consumption/production of healthcare per capita.     

Trade costs, international production shifting, and growth

In this paper I present a North-South endogenous growth model in which the impact of globalization on production location and growth can be analyzed. In the model the skilled-labor abundant North is the only innovator in the world. Using the model, I illustrate a scenario that is particularly interesting. Globalization (a reduction in trade costs) leads to a relocation of production to the South in a differentiated-product sector. As a result, more resources are shifted to R&D in the North, and the growth rate in the world increases. The model has several empirically consistent implications, such as rising relative wages of skilled to unskilled labor under globalization in both the North and South. I also discuss the welfare impact of globalization in this model.     

Effects of a blocking patent on R&D with endogenous survival activities

This study analyzes the effect of strengthening patent protection for innovation and economic growth by introducing a blocking patent into the endogenous growth model developed by Furukawa (Econ Lett 121(1):26–29, 2013a), which features survival activity of patent holders in the R&D sector with a variety-expansion model. Results show that strengthening patent protection can raise the economic growth rate and social welfare through an endogenous survival investment. Additionally, this study examines the effects of increasing subsidies for R&D. We find that increasing R&D subsidy rate can negatively affect economic growth and social welfare because of the investment for survival activities. This result shows the novel role of a blocking patent in determining innovation effects of R&D subsidies. Furthermore, we analyze the effect of patent breadth which is another patent instrument in this model on innovation and economic growth. Results show that the growth and welfare effects of the profit-division rule and the subsidy rate for R&D may vary with the size of patent breadth.     

Wage bargaining,trade and growth

We construct a North-South product-cycle model of trade with fully-endogenous growth and union wage bargaining. Economic growth is driven by Northern entrepreneurs who conduct R&D to innovate higher quality products. Northern production technologies can leak to the South upon successful imitation. The North has two sectors: a tradable industrial goods sector (manufacturing) where wages are determined via a bargaining process and a non-tradable sector (services) where wages are flexible. The South has only a tradable industrial goods sector where wages are flexible.We find that unilateral Northern trade liberalization, in the form of lower Northern tariffs on industrial goods, increases the rate of innovation but decreases both the bargained wage in the industrial sector and the flexible wage in the service sector. The wage effects are relative to the Southern wage rate. We also consider a variant of the model with Northern unemployment, driven by a binding minimum wage in the non-tradable service sector. In this case, Northern tariff cuts decrease the innovation rate and the bargained wage rate. In addition, the Northern unemployment rate increases. The model thus highlights the role of labor market institutions in determining the growth and labor market effects of tariff reductions. We also study the effects of unilateral Southern trade liberalization.     

Monetary policy uncertainty and interest rate targeting

This paper studies the issue of monetary delegation in the case where central banker’s preferences are uncertain. A distinctive feature of the analysis is that it introduces nominal interest rate targets to the monetary delegation scheme in addition to linear contracts, quadratic punishments, and inflation targets. This paper shows that the implementation of interest rate targeting will improve social welfare since it leads the central bank to make smaller interventions, which limits the scope for the central bank’s uncertain preferences to impact the economy.     

Growth effects of environmental policy when pollution affects health

In this paper, we develop a R&D-based growth model with a pollution externality and a health production sector. We study how health-impairing pollution affects long term growth, and the effect of an emissions' reduction policy (tax). We show that a tighter environmental tax has positive effects on growth via two channels. On the one hand, it improves workers' health and, thereby, productivity; on the other hand, it induces a reallocation of resources towards R&D and, thereby, higher research intensity. The size of the growth effect of a tighter environmental tax, and the level of the optimal environmental tax, are both positively correlated with the weight individuals place on health relative to consumption. As for welfare, a tighter environmental tax brings about utility gains in the long run and, potentially, also in the short run.     

The impact of the informal economy on R&D,wage inequality and economic growth

We extend the existing research and development (R&D) growth literature by focusing on the short–medium–long run effects of the informal sector on R&D intensity, wage inequality and economic growth, and by considering 18 OECD countries between 1990 and 2008. We show that: the steady state is unique and stable; the share of informal economy (IE) in production affects negatively R&D intensity and wage equality; Nordic countries have the lowest share of IE in production, while Mediterranean countries have the highest share of IE, wage inequality and R&D intensity but R&D spillovers are lower.     

Minimum wage, exports and growth

Using an endogenous growth model in an open economy, we study the impact of minimum wages on growth for an innovator country. We state that a minimum wage shifts efforts from production to R&D, but only in an open economy. Thus, it speeds up long-run growth in proportional to exports. Calibrations suggest the growth surplus can be significant. An empirical study on 11 OECD countries illustrates these results. The impact on welfare is ambiguous because the minimum wage induces unemployment. However, we show that in an open economy, a minimum wage associated with unemployment benefits can Pareto dominate laissez-faire.     

The Welfare and Employment Effects of Centralized Public Sector Wage Bargaining

In many countries, the government pays almost identical nominal wages to workers living in regions with notable economic disparities. By developing a two‐region general equilibrium model with endogenous migration and search frictions in the labor market, I study the differences in terms of unemployment, real wages, and welfare between a regional wage bargaining process and a national one in the public sector. Adopting the latter makes residents in the poorer region better off and residents of the richer region worse off. Private sector employment decreases in the poorer region and it increases in the richer one. Under some conditions, the unemployment rate in the poorer region soars.     

Endogenous R&D networks when labour unions have preferences over wages and employment

We develop a model to analyse the pattern of R&D network formation when unions have relative preferences over wages and employment. Within a three-firm industry, we show that when the unions place a low weight on wages and technological spillovers are low, a partial R&D network that includes two firms but excludes the third emerges in equilibrium. In contrast, when the unions care a lot about wages, a complete R&D network that includes all firms emerges. For all other intermediate levels of union preferences over wages, there is no strong stable equilibrium network. Empirical implications emerge from these findings, which are also discussed.     

Macroeconomic Control in the Transforming Chinese Economy: An Analysis of the Long‐Run Effect

This paper analyzes the issue of macroeconomic control in the Chinese economy where there is a dual structure (consisting of a state sector and a non‐state sector) and the financial sector is still under tight control by the government. Given the dual structure and financial repression, when inflation is a severe problem, the authors investigate whether it is possible for the government to bring inflation under control without hampering long‐term economic growth performance. The investigation is conducted within the context of an endogenous growth model that incorporates the two major institutional features of the transforming Chinese economy. The paper evaluates the long‐run effects of changes in government monetary and fiscal policies on the major macroeconomic aggregates. The analysis suggests that increasing in the interest rate on government bonds will reduce inflation without affecting the growth rate of output; while increasing the nominal interest rate on bank deposits will exert a stagflationary effect on the economy: raising the inflation rate but reducing the growth rate of output.     

University patents,R&D competition,and social welfare

Although university patenting has increased dramatically over the past three decades, debates persist regarding the broad economic implications of the phenomenon. This article examines the social welfare implications of university patenting in a model of R&D competition in which firms develop innovations on the basis of the disclosure of a university invention. When such disclosure does not preempt the patenting of downstream innovations, university patenting enhances social welfare only if a regime of open access to university inventions is characterized by excessive aggregate R&D from the viewpoint of social welfare. When the university invention disclosure preempts patenting on firms’ innovations, the nature of the open access equilibrium in the R&D market depends on the threat of imitation ex post. Only when the threat of imitation is sufficiently strong firms will not invest in downstream R&D in the open access regime. In this case, university patenting promotes R&D investment and increases social welfare.     

Optimal fiscal and monetary policy with sticky wages and sticky prices

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominally risk-free debt, and money creation. Our main result is that sticky wages alone make price stability optimal in the face of shocks to the government budget, to a degree quantitatively similar as sticky prices alone. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. Our results thus show that when nominal wages are sticky, setting real wages as close as possible to their efficient path is a more important goal of optimal monetary policy than is financing innovations in the government budget via state-contingent inflation. A second important result is that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of a type of labor market imperfection that is widely-believed to be important.     

Advantages of backwardness and forwardness with shifting comparative advantage

This paper develops a multi-sector endogenous innovation model that is able to account for the dynamics of comparative advantage of each sector within the economy. The model in this paper assumes that two kinds of learning effects exist in R&D: advantages of backwardness and forwardness. It is shown that if the economy is divided into advanced and backward sectors, in the latter sectors, the advantage of backwardness dominates, leading to cyclic repetition of comparative advantage. However, in the former sectors, the advantage of forwardness becomes more significant, so comparative advantage among these sectors stabilizes. Thus, the direction of learning spillovers has a critical effect on the dynamics of comparative advantage. Given this result, it is shown that only R&D policies for the marginal sector are effective in facilitating economic growth. If a decision is made to facilitate R&D investment within advanced sectors, R&D taxes, rather than subsidies, should be imposed on this marginal sector. Moreover, it is shown that trade liberalization does not affect the intrinsic dynamics of comparative advantage among surviving sectors in the economy if the locus of this marginal sector does not change significantly after trade liberalization.     

Optimal Monetary Policy

Optimal monetary policy maximizes the welfare of a representative agent, given frictions in the economic environment. Constructing a model with two sets of frictions—costly price adjustment by imperfectly competitive firms and costly exchange of wealth for goods—we find optimal monetary policy is governed by two familiar principles. First, the average level of the nominal interest rate should be sufficiently low, as suggested by Milton Friedman, that there should be deflation on average. Yet, the Keynesian frictions imply that the optimal nominal interest rate is positive. Second, as various shocks occur to the real and monetary sectors, the price level should be largely stabilized, as suggested by Irving Fisher, albeit around a deflationary trend path. Since expected inflation is roughly constant through time, the nominal interest rate must therefore vary with the Fisherian determinants of the real interest rate. Although the monetary authority has substantial leverage over real activity in our model economy, it chooses real allocations that closely resemble those which would occur if prices were flexible. In our benchmark model, there is some tendency for the monetary authority to smooth nominal and real interest rates.     

Government Subsidies of R&D in a Product Cycle Framework: US–Japan Simulations

The welfare effects of R&D subsidies are examined using a product cycle model of trade between two developed countries. Simulations are done for steady-state welfare in Japan and the USA for high- and low-skilled labor over different combinations of subsidy rates. Japanese subsidies to R&D usually benefit Americans owing to an increase in product variety. However, because Japanese R&D reduces wages in the US high-tech sector, American high-skilled workers are hurt if Japanese subsidies are too large. Large American subsidies may cause Japanese innovation to cease. However, Japanese steady-state welfare would be maximized in this case.     

The struggle to survive in the R&D sector: Implications for innovation and growth

By allowing for investment activities by research and development (R&D) firms to prevent product obsolescence, we show that if legal patent protection is too strong, a higher R&D subsidy rate delivers insufficient investments for survival in the R&D sector, depressing innovation and growth in the long run.     

Does Environmental Policy Necessarily Discourage Growth?

This paper analyzes the long-run impact of an environmental policy on economic growth. A growth model with vertical innovation is modified by including intermediate goods as a source of pollution. Taxation on pollution reduces profits of intermediate firms as well as final outputs. However, it increases their mark-ups and alleviates profit losses. In this setting, profit losses are offset by the general equilibrium effect; thus, the tax enhances R&Ds which drive economic growth while it reduces pollution. If the government provides an R&D subsidy, the growth rate will be accelerated.