Growth and Real Effects of Monetary Policy: R&D and Physical Capital Complementarities

What is it about?

This paper studies the real long-run effects of the structural stance of monetary policy and of inflation. This is carried out in the context of a monetary growth model where R&D is complemented with physical capital accumulation. We look into the effects on a set of real macroeconomic variables that have been of interest to policymakers—the economic growth rate, real interest rate, physical investment rate, capital-to-labor ratio, R&D intensity, and velocity of money. These variables have been previously analyzed from the perspective of different, separated, strands of the theoretical and empirical literature. Additionally, we analyze the long-run relationship between inflation and both the effectiveness of real industrial-policy shocks and the market structure, assessed namely by average firm size. We present novel cross-country evidence on the empirical relationship between the latter and long-run inflation.

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Why is it important?

The real effects of inflation and of the structural stance of monetary policy over the long run are acknowledged by policymakers, as well as confirmed by the empirical evidence gathered by academic economists. It is important to shed light on the different mechanisms at play relating the several real macroeconomic variables of interest and inflation.