Monetary policy, investment and innovation

Chapter 6 Monetary policy, investment and innovation

The 2008 Global Financial Crisis was followed by a period of persistently low innovation around many advanced economies, potentially contributing to slower productivity growth and economic recovery alongside other structural factors. While innovation investments were resilient during the COVID-19 shock, the overall impacts on innovation and IP are difficult to predict.

In this insights chapter, IP Australia previews forthcoming research conducted by economists from the RBA, Jonathan Hambur and Omer Majeed, and Robert Breunig of the Australian National University. The research offers new evidence for how macroeconomic conditions and monetary policy shape IP and innovation in Australia.

Key findings

  • Economic downturns have the potential to limit innovation and thereby impact productivity growth over the long-run. Forthcoming work examines these issues using monetary policy ‘shocks’ as an externally caused change in economic conditions.
  • Monetary policy shocks have a limited effect on domestic patenting by Australians.
  • However, contractionary monetary policy shocks are associated with a decline in national R&D spending and domestic trade mark filings one to two years after the shock.
  • The share of firms that undertake innovative activity also falls following a contractionary monetary policy shock, driven by small and medium enterprise.
  • Overall, the results suggest that economic conditions and monetary policy can have medium-run effects on innovative activity and potentially productivity. 

How do macroeconomic conditions and monetary policy affect innovation in Australia?

Macroeconomic and financial conditions can shape businesses’ incentives to invest, adopt technology and innovate. When demand is strong, firms may have more cash to spend on innovation and could expect to earn larger profits from new products. Conversely, when demand is weak firms may have incentive to implement cost-saving innovations.

To the extent that economic downturns affect innovative activity they could have sustained effects on the economy’s productive capacity and output. For example, the Global Financial Crisis was followed by persistent below-trend business R&D spending, patenting activity and trade mark registrations in many countries1. Several papers have argued that this contributed to a slower economic recovery by weighing on productivity growth2.

Unfortunately, it can be difficult to assess how macroeconomic conditions affect innovation and adoption. While macroeconomic conditions can affect innovation, the effects can also run the other way. For example, innovation in computers and their diffusion throughout the economy have contributed to economic growth in recent decades.

One way to get around these issues is to look for ‘exogenous’ shocks that affect demand. Majeed, Hambur and Breunig (forthcoming) investigate the effects of surprise changes, or shocks, in monetary policy and interest rates that lead to tighter economic and financial conditions3. This helps isolate the effect of macroeconomic conditions on innovation, adoption and potentially productivity over the medium term, while exploring the effects of monetary policy on these outcomes.

The study uses aggregate data on patents and trade marks filed in Australia by Australian residents from IP Australia’s IP Longitudinal Research Dataset (IPLORD) and aggregate R&D spending data from the ABS National Accounts. Both are used at a quarterly frequency over a sample from early 1994 to 2019 to align with the shock variable. The study also uses annual firm-level data on innovation from the ABS Business Characteristics Survey in BLADE. This captures around 8,000 firms each year from 2006 to 2018.

Preliminary analysis suggests that monetary policy has limited effects on the number of domestic patents filed by Australians (see Figure 6.1), which contrasts with findings in the US. For example, Ma (2023) found that expansionary monetary policy leads US firms to develop new patents several years after a shock4. This lack of response in Australian domestic patenting is consistent with Australia tending to be more an importer of new technologies than a producer. 

Figure 6.1 Effect of monetary policy shock on aggregate innovation metrics (quarterly response after 100 basis point shock)

Sources: ABS; IP Australia; RBA. Notes: Trade mark samples exclude 1994 to 1995 due to apparent break in series. Patents and trade marks include only those with only Australian filers. Dashed lines show 90% confidence interval.

However, when focusing on broader measures of innovation, commercialisation and adoption, there is evidence that monetary policy can have a significant influence. In the year following a 100-basis point contractionary monetary policy shock, national R&D spending declines by a little under 5%. The number of trade marks filed by Australians also falls by around 15% one to two years after the shock, although the latter finding is only marginally significant in a statistical sense.

Similarly, firm-level data suggests that the number of firms reporting that they adopted new (to business or to world) products or processes also declines following a contractionary monetary policy shock. This is particularly evident for SMEs, which see around a 5 percentage point decline for one to two years after a 100-basis point shock, while larger businesses appear to increase their adoption.

Together, these results suggest that strong economic and financial conditions tend to contribute to increased innovation and adoption, though much of the impact appears to be on the adoption and commercialisation of existing technology rather than development of new technologies. This suggests that downturns have the potential to have long-lasting economic impacts by limiting innovation, particularly for SMEs. While these findings may have implications for the recovery from COVID-19 the unique nature of the downturn means that the overall impacts on innovation and IP are difficult to predict.

  1. Innovation in the crisis and beyond, OECD Science, Technology and Industry Outlook 2012. Organisation for Economic Co-operation and Development (2012). 

  2. Anzoategui, D., Comin, D., Gertler, M. & Martinez, J. (2019). Endogenous technology adoption and R&D as sources of business cycle persistence. American Economic Journal: Macroeconomics, 11(3), 67–100; Moran, P. & Queralto, A. (2018). Innovation, productivity, and monetary policy. Journal of Monetary Economics, 93, 24–41.

  3. They use the monetary policy shock measures constructed in Beckers (2020). See Beckers, B. (2020). Credit spreads, monetary policy and the price puzzle [RBA Research Discussion Paper – RDP 2020-01].

  4. Ma, C. (2023). Firm liquidity and the innovation channel of monetary policy. Viewed 3 March 2023.