Does monetary policy impact innovation? Evidence from Australian Administrative Data

We examine whether monetary policy affects innovative activity and productivity in Australia. As a small open economy that primarily imports and adopts existing technology, research on Australia complements previous research on the United States. While contractionary policy reduces aggregate research and development spending, and in turn productivity, the effects appear more short-lived compared to the United States. When using survey measures of innovation that capture adoption, we find heterogenous responses. Small firms decrease innovation in response to contractionary monetary policy shocks, whereas large firms increase innovation. This heterogeneity may reflect differing exposures to the demand and financial constraint channels of monetary policy. United States monetary policy affects Australian firms’ innovation, at least in part by influencing global economic conditions.