A Monetary Variety-Expanding Growth Model with a Cash-in-Advance Constraint on Manufacturing

We highlight one difference in predictions between Romer's expanding variety model and the Schumpeterian quality-ladder model, when there exists a cash-in-advance (CIA) constraint on manufacturing. In the expanding variety model, a higher nominal interest rate decreases growth, and a negative nominal interest rate would be socially optimal. In contrast, in the quality-ladder model, a higher nominal interest rate increases growth. In the quality-ladder model, when the step-size of innovation is small (i.e., there may be R&D over-investment when the business-stealing effect dominates), the optimal nominal interest rate would be negative. When the step-size of innovation is large, the optimal nominal interest rate would be positive.