A1186
Title: Long-run neutrality meets reality: Innovation and monetary policy
Authors: Michaela Elfsbacka Schmoller - European Central Bank (Germany) [presenting]
Abstract: The focus is on studying the effect of monetary policy shifts on innovation using a large, representative survey of German firms with unique, granular information. The findings show that interest rate hikes in 2022-2023 have significantly affected innovation investment, with about 30\% of firms reducing expenditures, of which about 40\% cut to zero. Rich information is further exploited from hypothetical, incremental rate change scenarios to analyze potential asymmetries and non-linearities in the transmission mechanism of monetary policy to innovation. The effect of forward guidance is studied, which suggests that announcements influence firms' innovation decisions and longer-term aggregate supply. The results challenge the long-run neutrality of monetary policy, a key assumption in New Keynesian models, and suggest that monetary policy significantly affects firms' innovation investment and, thus, technology growth and aggregate supply over the medium term and beyond.
