Inflation, innovation, and technology transfer in an open economy with variety expansion

Abstract This study explores the cross‐country effects of inflation on innovation and technology transfer in a North–South variety‐expansion model. We find that higher southern inflation causes a permanent increase in the North–South relative wage ratio, a temporary decrease in the northern innovation rate, and a permanent decrease in technology transfer. Higher northern inflation causes a permanent decrease in the North–South relative wage ratio, a temporary decrease in the northern innovation rate, and a permanent decrease (increase) in technology transfer if the southern population is sufficiently small (large). We calibrate the model to the China–US data to justify the model implications.