Monetary Policy, Economic Uncertainty, and Firms R&D Expenditure

This paper studies the response of firms’ research and development (R&D) expenditure to monetary policy shocks in the US economy. I show that a 20-basis-point increase in the policy interest rate reduces aggregate R&D spending by about 0.6 percent, leading to a delayed decline in total factor productivity. Using firm-level data from Compustat, I document that contractionary monetary policy generates a persistent reduction in firms’ R&D expenditure. The response is asymmetric, with significantly stronger effects following interest rate hikes and during periods of elevated economic uncertainty. The mechanism operates through financial constraints: higher uncertainty lowers firms’ leverage and tightens borrowing conditions, rendering R&D investment particularly sensitive to monetary policy shocks. I develop a DSGE model with endogenous growth and financial frictions, which highlights the credit channel as a key mechanism amplifying the impact of monetary policy on innovative investment.