Innovation, productivity, and monetary policy

Abstract

To what extent can monetary policy impact business innovation and productivity growth? We use a New Keynesian model with endogenous total factor productivity (TFP) to quantify the TFP losses due to the constraints on monetary policy imposed by the zero lower bound (ZLB) and the TFP benefits of tightening monetary policy more slowly than currently anticipated. In the model, monetary policy influences firms incentives to develop and implement innovations. We use evidence on the dynamic effects of R&D and monetary shocks to estimate key parameters and assess model performance. The model suggests significant TFP losses due to the ZLB.

The effectiveness of monetary policy and output fluctuations: An asymmetric analysis

“…In this case, an investment function based on Tobin's q can explain long‐run shifts in the capital stock, which respond to short‐run interest rates set by monetary policy . The effect of monetary policy shocks on capital accumulation and total factor productivity in the long run has also been confirmed in the recent literature (e.g., Benigno & Fornaro, 2018; Gopinath, Kalemli‐Ozcan, Karkarabounis, & Villegas‐Sanchez, 2017; Jorda, Taylor, & Singh, 2019; Liu, Mian, & Sufi, 2019; Moran & Queralto, 2018).…”

“…Moran and Queralto (2018) reveal how monetary policy influences business innovation and productivity growth. They use a New Keynesian model with endogenous total factor productivity to quantify the total factor productivity losses due to the constraints on monetary policy imposed by the zero lower bound and the total factor productivity benefits of tightening monetary policy more slowly than currently anticipated.…”

The Long-Run Effects of Monetary Policy

“…Our paper is also related to the recent literature that emphasizes slow recovery following the Great Recession due to endogenous productivity growth (Anzoategui, Comin, Gertler, and Martinez, 2018;Bianchi, Kung, and Morales, 2019), labor force participation (Erceg and Levin, 2014;Galí, 2016), or skill depletion (Kiyotaki and Zhang, 2017). Of these, Moran and Queraltó (2018) As Lucas (1996) confessed in his Nobel lecture, in seeking to understand how changes in the conduct of monetary policy can influence inflation, employment, and production: "So much thought has been devoted to this question and so much evidence is available that one might reasonably assume that it had been solved long ago. But this is not the case..." This paper has not only important implications for the conduct of monetary policy, it also makes a contribution in furthering our understanding of how monetary economies work.…”

Slow Post-Financial Crisis Recovery and Monetary Policy

“…is the subjective discount factor, and C t is consumption. Moreover, under the staggered price setting, retail goods'price equation (19) and the price dispersion equation (25) can be reduced respectively to…”

“…where V ar is the unconditional variance operator, c t (= C t =A t 1 ) is detrended consumption, its steady-state value is denoted by c, " x = E[x t ] x is the "bias"between the unconditional mean and the steady-state value of variable x t , and w;t = R 1 0 (W f;t =W t ) n (1+1= ) df denotes wage dispersion arising from the staggered wage setting of households. 25 Note that in the second-order approximation, the bias can exist; that is, the unconditional mean does not necessarily coincide with the steady-state value. The approximation (57) shows that the stationary welfare measure SW is negatively related to the biases in labor and wage dispersion and the unconditional variances of detrended consumption, the rate of technological change, and labor (i.e., " n , " w , V ar (c t ), V ar ( t ), V ar (n t )) and is positively related to the biases in detrended consumption and the rate of technological change (i.e., " c , " ).…”