Monetary-policy tightening both reduces firms’ incentive to innovate by decreasing overall demand, and curtails financial investment through less optimal financial conditions and reduced appetite for risk taking, economists Yueran Ma and Kaspar Zimmermann found. Ma presented the paper at the conference in Jackson Hole, Wyoming, hosted by the Kansas City Fed.
An interest-rate increase of 1 percentage point leads to a 1% to 3% drop in spending on research and development and a 25% decline in venture capital investment in the next one to three years, the authors found. Central banks around the world have raised interest rates to try and cool inflation that was in part driven by outsize demand as economies emerged from the Covid-19 pandemic.
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