For more than 50 years, most economists have agreed that measures taken by central banks to stabilize prices and production can work in the short run but not in the long run. The late Nobel Prize winner Milton Friedman, who studied and studied at the University of Chicago, argued so in his 1968 presidential address to the American Economic Association.
But research by Yuelan Ma of Chicago Booth and Kaspar Zimmermann of the Frankfurt School of Finance and Management suggests that U.S. monetary policy may not be so neutral in the long run, especially when it comes to its impact on innovation. Their analysis suggests that high interest rates can discourage companies and industries from investing in technology, which could slow the pace of innovation and limit economic growth.
To understand the relationship between innovation financing and monetary policy shocks, Ma and Zimmerman studied widely used indicators of innovation, including total investment in intellectual property in the United States, venture capital investment, R&D expenditures of publicly listed companies, and patent applications. Their analysis covers monetary policy shocks from 1969 to 2007 and focuses on the effects of traditional policies, i.e., interest rate adjustments, rather than unconventional measures such as quantitative easing.
Ma and Zimmerman calculated that for every 1 percentage point increase in interest rates, R&D spending fell by 1 to 3 percent, and venture capital investment fell by about 25 percent in the first 1 to 3 years after the rate hike. Similarly, within 4 years of an interest rate hike, patent applications and innovation each fell by 9 percent.
The researchers estimate that over the next five years, these changes could lead to a 1 percent drop in overall economic output and a 0.5 percent drop in total factor productivity — a measure of how many more goods and services are produced with the same resources.