Working Papers
Monetary Policy and R&D: Heterogeneous and Persistent Effects [pdf]
Abstract
This paper examines the enduring effects of monetary policy through 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 and financially constrained firms expand R&D more following an interest rate cut, with the peak effect occurring around four years after the shock. A DSGE model with heterogeneous firms and endogenous growth replicates these dynamics and highlights the roles of firm heterogeneity, entry and exit dynamics, and financial frictions in shaping monetary transmission. The model emphasises two key mechanisms: in the short run, monetary easing facilitates innovation among entrants, while, over time, incumbents drive innovation as the selection effect strengthens through the exit of less productive firms and the reallocation towards more efficient ones. A simulated one-standard-deviation interest rate cut results in a persistent increase in aggregate productivity and growth, leading to GDP being approximately 0.1% higher in the long run. Within this framework with endogenous growth and firm heterogeneity, welfare improves when monetary policy is gradual and places some weight on output stabilisation alongside inflation, with an optimal inflation target of 2–2.5 p.p. best supporting innovation and long-run growth.Presented at (* scheduled): 2nd Banca d’Italia Annual Research Conference on Monetary Policy* (poster), 2nd Kiel-CEPR Monetary Policy Conference* (poster), WIMFEH Workshop*, Banco de España, Universidad de San Andrés, Universidad de los Andes - Chile, Bank of England, Naples School of Economics - 4th PhD and Post-Doctoral Workshop, XXVIII Workshop on Dynamic Macroeconomics (Vigo), Theories and Methods in Macroeconomics (T2M), University of California, Berkeley - Macro Colloqium, Federal Reserve Bank of San Francisco - Brown Bag Seminar, Universitat Pompeu Fabra - Macro Lunch, University of Nottingham - PhD Conferences and Brown Bag.
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
Abstract
This paper develops a structural model to study the trend real interest rate in small-open economies, R̃-star. Impediments to global capital mobility can drive a wedge between the global trend real interest rate, R-star, and R̃-star, necessitating country-specific analyses. Our specific focus is to quantify the evolution of R̃-star in the UK, a small-open international financial centre, relative to R-star in the rest of the world. The model captures six potential drivers of R̃-star: productivity growth, population growth, longevity, government debt, risk premia, and fragmentation of global capital markets. Against the backdrop of a decline in the global neutral real interest rate (R-star) of around 2.5 p.p. over the past half-century, the model suggests a more muted decline — around 1.5 p.p. — in the UK. However, looking ahead, increased geo-economic fragmentation poses significant upside risks to UK equilibrium rates, of nearly 0.8 p.p..Presented at: Universidad de San Andrés - Annual Alumni Conference, Bank of England, CEBRA Annual Meeting 2025 (co-author), 5th EUI Alumni Conference in Economics (co-author).
Work in Progress
Floating or Pegged?: Trade Shock Adjustment in Small Open Economies
with Guido Lamarmora
Abstract
We study how monetary policy and exchange rate regimes shape the adjustment to trade shocks in small open economies (SOEs). The analysis highlights different implications for SOEs under different currency regimes, sovereign risk, and trade exposure. We find evidence of incomplete labour market adjustment, with rising unemployment after negative external demand shocks in SOEs under both pegged and floating regimes, with stronger effects in countries facing high-risk premia. We build a dynamic multi-sector trade model with downward nominal wage rigidity (DNWR), intertemporal consumption–savings decisions, and incomplete markets. The model includes two SOE regimes: floating, with endogenous monetary policy, or pegged. Under a peg, a negative external demand shock generates unemployment in the presence of DNWR. Under a float, unemployment can also arise if the monetary policy response limits the nominal depreciation’s ability to restore full employment. Furthermore, a spike in sovereign risk premia can amplify this effect.Presented at: GEP-Nottingham International Trade Summer School.
Understanding OPEC’s Decisions: Evidence from a Regime-Switching Model
Abstract
This paper examines the determinants of OPEC production decisions within a regime-switching framework that captures structural shifts in the bloc’s behaviour across regimes. Using rich data on oil prices, production, targets, and market fundamentals, the analysis distinguishes between a price-stabilising regime—characterised by coordination and compliance—and a competitive regime driven by market-share considerations. The findings indicate that the drivers of OPEC’s decisions are regime-dependent, with oil price cycles and market shares playing distinct roles across states. The proposed framework enhances both the interpretability and predictive power of models explaining OPEC’s collective behaviour.Monetary Policy, Capital and R&D Misallocation
Abstract
This paper analyses how monetary policy affects the misallocation of capital and R&D within a New Keynesian model featuring heterogeneous firms and financial frictions. The model emphasises the intensive margin of R&D investment and shows that a monetary expansion has distributional effects that boost aggregate productivity. By lowering interest rates, monetary policy relaxes financial constraints, allowing firms with higher returns to capital to increase both their capital and R&D investments more strongly than their lower-productivity counterparts. This reallocation of resources toward more productive firms reduces misallocation of capital and R&D inputs, driven by the complementarity between the two. Allowing for R&D spillovers further amplifies the economy-wide productivity response.Presented at: University of Nottingham - PhD Conference.
Financial Frictions, Monetary Policy and Unemployment
Abstract
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.Presented at: Asociación Argentina de Economía Política.