Working Paper: NBER ID: w31698
Authors: Yueran Ma; Kaspar Zimmermann
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.
Keywords: Monetary Policy; Innovation; Venture Capital; R&D; Patenting
JEL Codes: E2; E5; G31; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy tightening shock (E39) | R&D spending (O32) |
| Monetary policy tightening shock (E49) | Venture capital investment (G24) |
| Monetary policy tightening shock (E49) | Patenting in important technologies (O34) |
| Monetary policy tightening shock (E49) | Aggregate demand (E00) |
| Aggregate demand (E00) | R&D spending (O32) |
| Monetary policy tightening shock (E39) | Profitability and incentives for innovation (O31) |
| Profitability and incentives for innovation (O31) | R&D spending (O32) |
| Monetary policy tightening shock (E39) | Availability of funding for innovative projects (O36) |
| Availability of funding for innovative projects (O36) | Venture capital investment (G24) |
| Monetary policy tightening shock (E49) | Long-term output in the economy (E23) |