Working Papers
Monetary Policy and R&D: Heterogeneous and Persistent Effects
This paper examines the enduring effects of monetary policy through its impact on firms’ R&D decisions. Empirical evidence from U.S. data suggests that firms’ R&D responses to monetary policy shocks are heterogeneous and persistent. In particular, relatively productive yet financially constrained firms drive a positive response to an interest rate cut, with the peak effect occurring approximately four years after the shock. These dynamics are analyzed through the lens of a DSGE model with heterogeneous firms and endogenous growth. The theoretical framework highlights the role of firm heterogeneity, entry and exit dynamics, and financial frictions in shaping the transmission of monetary policy. A simulated 1pp annual interest rate cut results in a persistent increase in aggregate productivity and growth, leading to GDP being approximately 5% larger in the long run. The model emphasizes two key mechanisms: in the short run, monetary easing facilitates innovation among entrants, while, over time, innovation is increasingly driven by incumbents as the selection effect strengthens.
Previously titled: "Heterogeneous Firms, Monetary Policy, and Growth"
The Natural Rate of Interest in Small-Open Economies: Asymmetries and Fragmentation
with Ambrogio Cesa-Bianchi, Simon Lloyd, and Rana Sajedi
This paper develops a structural model to study the trend real interest rate in small-open economies. Impediments to global capital mobility can drive a wedge between the global trend real interest rate, necessitating country-specific analyses. Our specific focus is to quantify the evolution of natural rate of interest in the UK, a small-open international financial centre, relative to the rest of the world. The model captures five potential drivers: productivity growth, population growth, longevity, risk premia, and fragmentation of global capital markets. Against the backdrop of a decline in global neutral real interest rate of around 3pp in the past half century, the model suggests a more muted decline—of around 2.5pp—in the UK. However, looking ahead, increased geo-economic fragmentation poses significant upside risks to UK equilibrium rates, of nearly 0.5pp.
Work in Progress
Monetary Policy and R&D Misallocation
A general equilibrium model with firm heterogeneity, financial frictions, and nominal rigidities is developed to investigate how monetary policy can address R&D misallocation, with a focus on the intensive margin. The model reveals that monetary expansion has distributional effects that boost R&D activities and aggregate productivity. By lowering interest rates, monetary policy eases financial constraints, allowing high-productivity firms to increase their R&D investments more significantly than their lower-productivity counterparts. This shift in resource allocation towards more productive firms enhances overall productivity through both capital and R&D misallocation channels, underscoring the complementary relationship between R&D and capital.
Financial Frictions, Monetary Policy and Unemployment
DSGE models have incorporated financial frictions as mechanisms that can trigger crises. Additionally, significant contributions have been made in modeling labor market rigidities and (involuntary) unemployment. This paper integrates these two literatures into a single model to provide a more comprehensive analysis of the impact of financial crises—such as the subprime crisis on the U.S. economy—and the policies implemented to mitigate their effects.