Innovation, financial frictions, and persistent effects of monetary policy

Aydan Dogan and Ozgen Ozturk

No 1205, Bank of England Staff Working Paper series from Bank of England

Abstract: We study how the financing of innovation shapes the transmission of monetary policy to productivity. Using US firm balance-sheet data matched to loan contracts, we show that contractionary monetary policy shocks reduce cash flow similarly across firms but lower R&D more among those without access to cash flow-based borrowing, where credit is extended against earnings rather than collateral. In a New Keynesian endogenous growth model with heterogeneous access to external finance, we show that a 25 basis point tightening lowers output persistently by 0.12%. Extending access to all firms reduces this loss by one third. The loss falls disproportionately on firms without access, which are younger and produce more and higher-quality patents.

JEL-codes: E22 E32 E44 E52 G32 (search for similar items in EconPapers)
Pages: 69
Date: 2026-09-04
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023581

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