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Persistent slumps: Innovation and the credit channel of monetary policy

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  • Beqiraj, Elton
  • Cao, Qingqing
  • Minetti, Raoul
  • Tarquini, Giulio

Abstract

Monetary policy is increasingly found to exert long-run effects on the aggregate economy. We investigate the long-term effects of monetary policy through the credit channel. We develop a dynamic general equilibrium model with financial intermediaries and endogenous innovation in which credit frictions constrain firms’ investment and R&D expenses. Following an adverse monetary shock, the tightening of credit conditions for the innovation sector generates sizeable long-term effects, turning the shock into a persistent stagnation. We quantify the contribution of this transmission channel to productivity and output hysteresis. We then characterize the monetary policy trade-offs between short- and long-term targets, showing that the control of inflation can entail a growth slowdown. The results are consistent with Bayesian VAR estimates of the responses of credit and innovation aggregates to monetary shocks.

Suggested Citation

  • Beqiraj, Elton & Cao, Qingqing & Minetti, Raoul & Tarquini, Giulio, 2025. "Persistent slumps: Innovation and the credit channel of monetary policy," European Economic Review, Elsevier, vol. 172(C).
    • Handle: RePEc:eee:eecrev:v:172:y:2025:i:c:s0014292124002757
    DOI: 10.1016/j.euroecorev.2024.104946
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    More about this item

    Keywords

    Monetary policy; Business cycles; R&D; Stagnation; Credit;
    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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