Do Monetary Policy and Economic Conditions Impact Innovation? Evidence from Australian Administrative Data

Author name: 
Majeed O
Hambur J
Breunig R

This paper examines whether monetary policy and economic conditions affect innovative activity and productivity in Australia, a small open economy that tends to import innovation from overseas. Most interestingly, United States monetary policy spills over and affects Australian firms’ innovation. Within Australia, contractionary monetary policy reduces aggregate R&D spending and this leads to reduced productivity growth. However, using firm-level data and a survey measure of innovation that also captures adoption, we find heterogenous responses across different firm types. Small firms decrease innovation in response to contractionary monetary policy shocks whereas large firms increase innovation. This heterogeneity appears to reflect differing exposures to the demand and financial constraint channels of monetary policy. Overall, our results suggest that monetary policy and economic conditions have medium-run effects on productivity, though the effects are more heterogeneous than previously documented.

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