Effects of Monetary Policy in a Model With Cash‐in‐Advance Constraints on R&D and Capital Accumulation

ABSTRACT To examine the effect of monetary policy on economic growth, we formulate an endogenous growth model with cash‐in‐advance constraints on R&D and capital accumulation as endogenous growth engines. Within this framework, we show that the relationship between economic growth and the nominal interest rate can be an inverted‐U shape. Moreover, we demonstrate that the welfare‐maximizing level of the nominal interest rate is larger than the growth‐maximizing level of the nominal interest rate. Finally, we calibrate the model using data of the United States to evaluate the growth‐ and welfare‐maximizing levels of the nominal interest rate quantitatively.