Inflation and Income Inequality in an Open-Economy Growth Model with Liquidity Constraints on R&D

This study explores the relationship between inflation and income inequality in an open-economy Schumpeterian growth model with heterogeneous households, firm-level innovation, and cash-in-advance constraints on R&D investment. We find that income inequality may monotonically increase with domestic inflation or display a U-shaped pattern, depending on the influence of a country’s technology growth on the global real interest rate. These predictions are supported by our quantitative model calibrated to the US and eurozone economies and empirical results using cross-country data