Working Paper

Money, Growth, and Welfare in a Schumpeterian Model with the Spirit of Capitalism


Abstract: According to Schumpeter (1934), entrepreneurs are driven to innovate not only for the fruits of success but for success itself. This description of entrepreneurship echoes Weber’s (1958) description of the “spirit of capitalism,” which states that people enjoy the accumulation of wealth irrespective of its effect on smoothing consumption. This paper explores the implications of the spirit of capitalism on monetary policy, growth, and welfare in a Schumpeterian growth model. Different from the existing literature, we show that money is not superneutral in the long run and could promote economic growth when the spirit of capitalism is strong. Furthermore, we show that the optimal nominal interest rate decreases with the strength of the spirit of capitalism, potentially supporting a negative interest rate. Finally, our calibrated model suggests that the spirit of capitalism explains an important share (about one-third) of long-run growth in the United States.

Keywords: Spirit of capitalism; Cash-in-advance; Schumpeterian model; Monetary policy; Growth and welfare;

JEL Classification: E52; O42; O47;

https://doi.org/10.18651/RWP2020-16

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Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 2020-11-09

Number: RWP 20-16