Working Paper: CEPR ID: DP16184
Authors: J. David López-Salido; Jonathan E. Goldberg; Craig Chikis
Abstract: The answer to this question crucially depends on the nature of creative destruction.In Schumpeterian models, if innovation by market laggards onlyincrementally refines their existing technology, then, as the interest rate fallsto very low levels, growth declines with low-R&D market leaders becoming entrenched.However, if market laggards have some chance to innovate radicallyand immediately catch up to the leading technology, low interest rates boostproductivity growth. Using micro data, we structurally estimate a Schumpeterianmodel that nests these alternative possibilities. In the estimated model, laggardshave a meaningful chance to innovate radically, implying that low interest ratesincrease growth and market competition. Incorporating firm entry, optimalpatent policy, and financial frictions strengthens our results.
Keywords: real interest rate; innovation; growth; markups
JEL Codes: E2; O31; O34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low interest rates (E43) | innovation by market laggards (O36) |
| low interest rates (E43) | productivity growth (O49) |
| innovation by market laggards (radical) (O36) | productivity growth (O49) |
| entrenched market leaders (L13) | lower growth (O40) |
| low interest rates (E43) | competition (L13) |
| strategic interactions among firms (L13) | dampening effect on productivity growth (O49) |