DP16184 Do Low Interest Rates Harm Innovation, Competition, and Productivity Growth?
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.