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

Author

Listed:
  • Omer Majeed

    (Reserve Bank of Australia)

  • Jonathan Hambur

    (Reserve Bank of Australia)

  • Robert Breunig

    (Crawford School of Public Policy, Australian National University)

Abstract
Recent papers have argued that monetary policy and economic conditions can influence the amount of innovative activity in the economy, and therefore productivity and living standards in the future. This paper examines whether this is the case for Australia, a small open economy that tends to import innovation from overseas. We find that contractionary (expansionary) monetary policy reduces (increases) aggregate research and development (R&D) spending, and that lower (higher) R&D spending reduces (increases) future productivity. However, using firm-level data and a broader survey measure of innovation that also captures adoption, we find heterogeneous 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 exposure to the channels through which monetary policy affects innovation. These channels include affecting demand or affecting financial conditions and constraints. We also find that US monetary policy spills over and affects Australian firms' innovation. 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. While the effects may cancel out over a cycle, this finding highlights the importance of stabilisation policy in preventing medium-run economic scarring.

Suggested Citation

  • Omer Majeed & Jonathan Hambur & Robert Breunig, 2024. "Do Monetary Policy and Economic Conditions Impact Innovation? Evidence from Australian Administrative Data," RBA Research Discussion Papers rdp2024-01, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2024-01
    DOI: 10.47688/rdp2024-01
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    innovation; monetary policy; firm-level data;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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