The AD-AS framework can explain (countercyclical) inflation coming from productivity shocks. R&D investments might mainly affect the supply side in a macroeconomy. They can cause the effect on the inflation change to work their way through the economy. In this paper, we test this argument by a new econometric approach developed by Pesaran et al.(2001). This bounds test has an advantage that it is applicative irrespective of nonstationarity in variables. This method applies ARDL(autoregressive distributed lag) model to the error correction model. It is used in testing the level relationships between inflation, R&D, wage and money in Korean economy. According to test and estimation results, there is (significant) level relationships between R&D and inflation. Through both long-run equilibrium relationships and short-run dynamics(error correction), R&D has reduced the rate of inflation in Korea.
I. Introduction
II. Economic Model and Empirical Analysis
III. Summary and Limitations
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