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Persistent Slumps: Innovation and the Credit Channel of Monetary Policy

Elton Beqiraj (), Qingqing Cao (), Raoul Minetti and Giulio Tarquini ()
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Elton Beqiraj: University of Rome I
Qingqing Cao: Michigan State University, Department of Economics, Postal: Department of Economics, Michigan State University, 110 Marshall-Adams Hall, 486 W. Circle Dr., East Lansing, MI 48824
Giulio Tarquini: University of Rome I

No 2023-3, Working Papers from Michigan State University, Department of Economics

Abstract: What are the long-run aggregate effects of monetary shocks displaying through the credit channel of monetary policy? We address this question by investigating the transmission mechanism and estimating the dynamic behaviour of variables related to credit and innovation. Then, we develop a DSGE model featuring endogenous growth, in which credit frictions constrain the financing of innovation. Under this paradigm, recessionary shocks develop into persistent stagnation. The deterioration of the R&D process, i.e. creation and adoption of new technologies, is at the core of hysteresis effects. We show the ability of our theoretical framework to reconcile with empirical evidence, quantifying the contribution of this channel to productivity and output hysteresis observed after the Global Financial Crisis.

Keywords: Endogenous Growth; R&D; Stagnation; Credit Frictions; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E22 E24 E32 E44 E52 G01 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2023-07-25
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-inv and nep-mon
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