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Persistent Slumps: Innovation and the Credit Channel of Monetary Policy

Author

Listed:
  • Beqiraj, Elton

    (University of Rome I)

  • Cao, Qingqing

    (Michigan State University, Department of Economics)

  • Minetti, Raoul

    (Michigan State University, Department of Economics)

  • Tarquini, Giulio

    (University of Rome I)

Abstract

What are the long-run aggregate effects of monetary shocks displaying through the credit channel of monetary policy? We address this question by investigating the transmission mechanism and estimating the dynamic behaviour of variables related to credit and innovation. Then, we develop a DSGE model featuring endogenous growth, in which credit frictions constrain the financing of innovation. Under this paradigm, recessionary shocks develop into persistent stagnation. The deterioration of the R&D process, i.e. creation and adoption of new technologies, is at the core of hysteresis effects. We show the ability of our theoretical framework to reconcile with empirical evidence, quantifying the contribution of this channel to productivity and output hysteresis observed after the Global Financial Crisis.

Suggested Citation

  • Beqiraj, Elton & Cao, Qingqing & Minetti, Raoul & Tarquini, Giulio, 2023. "Persistent Slumps: Innovation and the Credit Channel of Monetary Policy," Working Papers 2023-3, Michigan State University, Department of Economics.
    • Handle: RePEc:ris:msuecw:2023_003
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    More about this item

    Keywords

    Endogenous Growth; R&D; Stagnation; Credit Frictions; Monetary Policy;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises

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