Monetary Policy and Innovation

Yueran Ma and Kaspar Zimmermann

No 31698, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We document that monetary policy has a substantial impact on innovation activities. After a tightening shock of 100 basis points, research and development (R&D) spending declines by about 1 to 3 percent and venture capital (VC) investment declines by about 25 percent in the following 1 to 3 years. Patenting in important technologies, as well as a patent-based aggregate innovation index, declines by up to 9 percent in the following 2 to 4 years. Based on previous estimates of the sensitivity of output to innovation activities, these magnitudes imply that output could be 1 percent lower after another 5 years. Monetary policy can influence innovation activities by changing aggregate demand and correspondingly the profitability of innovation, and by changing financial market conditions. Both channels appear relevant in the data. Our findings suggest that monetary policy may affect the productive capacity of the economy in the longer term, in addition to the well-recognized near-term effects on economic outcomes.

JEL-codes: E2 E5 G31 O3 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-ino, nep-mon and nep-tid
Note: CF EFG ME PR
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Citations: View citations in EconPapers (8)

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