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Do Low Interest Rates Harm Innovation, Competition, and Productivity Growth?

Author

Listed:
  • López-Salido, J David
  • Goldberg, Jonathan E
  • Chikis, Craig

Abstract

The answer to this question crucially depends on the nature of creative destruction. In Schumpeterian models, if innovation by market laggards only incrementally refines their existing technology, then, as the interest rate falls to very low levels, growth declines with low-R&D market leaders becoming entrenched. However, if market laggards have some chance to innovate radically and immediately catch up to the leading technology, low interest rates boost productivity growth. Using micro data, we structurally estimate a Schumpeterian model that nests these alternative possibilities. In the estimated model, laggards have a meaningful chance to innovate radically, implying that low interest rates increase growth and market competition. Incorporating firm entry, optimal patent policy, and financial frictions strengthens our results.

Suggested Citation

  • López-Salido, J David & Goldberg, Jonathan E & Chikis, Craig, 2021. "Do Low Interest Rates Harm Innovation, Competition, and Productivity Growth?," CEPR Discussion Papers 16184, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16184
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    More about this item

    Keywords

    Real interest rate; Innovation; Growth; Markups;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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