Persistent Slumps : Innovation & the Credit Channel of Monetary Policy

What are the long-run aggregate effects of monetary shocks displaying throughthe credit channel of monetary policy? We address this question by investigatingthe transmission mechanism and estimating the dynamic behaviour of variablesrelated to credit and innovation. Then, we develop a DSGE model featuring endogenous growth, in which credit frictions constrain the financing of innovation.Under this paradigm, recessionary shocks develop into persistent stagnation. Thedeterioration of the R&D process, i.e. creation and adoption of new technologies,is at the core of hysteresis effects. We show the ability of our theoretical frameworkto reconcile with empirical evidence, quantifying the contribution of this channelto productivity and output hysteresis observed after the Global Financial Crisis