This paper studies the state-dependent effect of monetary policy shocks on firms research and development (R&D) expenditure in the US economy. Empirical results suggest that a 20 basis point increase in the interest rate decreases the aggregate R&D expenditure by 0.6 percent. Furthermore, using Compustat firm-level data, I show a persistent decline in US firms’ R&D expenditure in response to contractionary monetary policy shocks. The effect on R&D expenditure is stronger for interest rate hikes and when firms face higher uncertainty. Economic uncertainty decreases firms’ leverage ratio and makes them more financially constrained. As a result, firms become more responsive in their R&D investment following a contractionary monetary policy shock. I use a medium-scale DSGE model with endogenous output growth and financial frictions to interpret the empirical results. The theoretical model highlights the importance of the credit channel for altering the effects of monetary policy on firms’ investment in R&D in the presence of economic uncertainty.

We analyze the economic impact of public infrastructure investment using European Investment Bank (EIB) loans to publicly owned firms and governments as an instrument for infrastructure shocks. To address endogeneity in loan approval, we apply the Inverse- Probability-Weighted Regression-Adjustment (IPWRA) estimator and a local projection IV approach. Our findings show that infrastructure investment boosts employment, output, and private investment in the medium term without causing inflation. The output multiplier peaks at seven two years after the shock, with larger effects in countries with higher debt-to-GDP ratios, public investment, corruption, and poor governance. Interestingly, in such countries, public investment strongly crowds in private investment, amplifying the overall impact.

This paper shows that debt-financed fiscal multipliers vary depending on the maturity of debt issued to finance spending. Utilizing state-dependent SVAR models and local projections for post-war US data, we show that a fiscal expansion financed with short-term debt increases output more than one financed with long-term debt. The reason for this result is that only the former leads to a significant increase in private consumption. To rationalize this finding, we construct an incomplete markets model in which households invest in long- and short-term assets. Short assets provide liquidity services; households can use them to cover sudden spending needs. An increase in the supply of these assets, through a short-term debt financed government expenditure shock, makes it easier for constrained households to meet their spending needs and crowds in private consumption. We first show this mechanism analytically in a simplified model, and then quantify it in a carefully calibrated New Keynesian model. We find that differences in fiscal multipliers across short-term and long-term financed shocks can be large. We explore how these differences are influenced by the monetary and fiscal policy rules..