Innovation and inequality in a monetary Schumpeterian model with heterogeneous households and firms

Angus C. Chu, Guido Cozzi, Haichao Fan, Yuichi Furukawa, Chih Hsing Liao

Research output: Contribution to journalArticlepeer-review

13 Scopus citations

Abstract

This study develops a monetary Schumpeterian growth model with heterogeneous households and heterogeneous firms to explore the effects of inflation on innovation and income inequality. Household heterogeneity arises from an unequal distribution of wealth. Firm heterogeneity arises from random quality improvements. Under endogenous firm entry, inflation has an inverted-U effect on economic growth and income inequality. Calibrating the model for a quantitative analysis, we find that the model can match the growth-maximizing and inequality-maximizing inflation rates that are estimated using cross-country panel data. Finally, we simulate the utility-maximizing inflation rate and explore how it is affected by relative household wealth.

Original languageEnglish
Pages (from-to)141-164
Number of pages24
JournalReview of Economic Dynamics
Volume34
DOIs
StatePublished - Oct 2019

Keywords

  • Economic growth
  • Heterogeneity
  • Income inequality
  • Inflation

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