Monetary policy and endogenous market structure in a schumpeterian economy

In this study, we develop a monetary Schumpeterian growth model with endogenous market structure (EMS) to explore the effects of monetary policy on the number of firms, �firm size, economic growth and social welfare. EMS leads to richer implications and different results from previous studies in which market structure is exogenous. In the short run, a higher nominal interest rate leads to lower growth rates of innovation, output and consumption and also smaller �rm size due to a reduction in labor supply. In the long run, an increase in the nominal interest rate reduces the equilibrium number of �firms but has no effect on economic growth and fi�rm size because of a scale-invariant property of the model as a result of entry and exit of fi�rms. Although monetary policy has no long-run effect on economic growth, an increase in the nominal interest rate permanently reduces the levels of output, consumption and employment. Taking into account transition dynamics, we �nd that social welfare is decreasing in the nominal interest rate. Given that a zero nominal interest rate maximizes welfare, Friedman rule is optimal in this economy.