Beyond the short run: Monetary policy and innovation investment

Michaela Schmöller, Olga Goldfayn-Frank and Tobias Schmidt

No 18/2025, Discussion Papers from Deutsche Bundesbank

Abstract: This paper provides novel empirical evidence on the impact of monetary policy on innovation investment using unique firm-level data. First, we document the ef- fect of a large, systematic monetary tightening (ECB rate increases from 0% to 4.5% during 2022-23), with average firm-level innovation cuts of 20%. These cuts persist over the medium term, indicating a sustained innovation slowdown. Second, we use the survey to identify elasticities of innovation expenditure to exogenous policy rate changes. Responses to hikes and cuts are significant and largely symmetric at the baseline rate (4.5%), though we detect potential state-dependent asymmetry due to the extensive margin. The financing channel emerges as one of the trans- mission channels, with more pronounced effects in firms with higher shares of bank loans and variable-rate loans. Crucially, we show that monetary policy transmits via aggregate demand, with stronger responses in firms with pessimistic demand expectations. Forward guidance provides substantial additional stimulus by re- ducing uncertainty about future rates, suggesting long-term, supply-side effects of announcements. These results challenge monetary long-run neutrality and are sug- gestive of policy endogeneity of R∗ operating through innovation-driven technology growth.

Keywords: Monetary Policy Transmission; R&D; Endogenous Growth; ForwardGuidance; R∗ (search for similar items in EconPapers)
JEL-codes: D22 E22 E24 E52 O30 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-eec, nep-eur, nep-mac, nep-mon, nep-sbm and nep-tid
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