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Beyond the Short Run: Monetary Policy and Innovation Investment

Author

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  • Elfsbacka-Schmöller, Michaela
  • Goldfayn-Frank, Olga
  • Schmidt, Tobias

Abstract

We study monetary policy transmission to innovation using a representative survey of German firms. Firms report persistent innovation investment reductions averaging 20% due to the ECB’s 2022–23 monetary tightening. A survey-based experiment shows that rate hikes lower and cuts raise innovation investment, with state-dependent asymmetry reflecting exit from innovation activity at high policy rates. Forward guidance stimulates innovation investment by resolving policy-rate uncertainty, providing novel evidence of its medium-term, supply-side effects. We document two distinct transmission channels—financing and demand expectations—with amplification under simultaneous exposure. Our findings suggest that monetary policy affects innovation-driven technological progress typically considered longer-term and policy-exogenous.

Suggested Citation

  • Elfsbacka-Schmöller, Michaela & Goldfayn-Frank, Olga & Schmidt, Tobias, 2026. "Beyond the Short Run: Monetary Policy and Innovation Investment," CEPR Discussion Papers 21992, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21992
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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