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 investment using European Investment Bank (EIB) loans for infrastructure to publicly owned firms and governments as an instrument for public investment 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 public investment boosts employment, output, and private investment in the medium term without causing inflation and significant effects on consumption and debt-to-GDP. The cumulative output multiplier reaches a maximum of 3.5 five years after the shock and is higher in countries with higher public debt-to-GDP ratios or under favorable financial conditions. Interestingly, the strong crowd-in effect on private investment amplifies the overall impact.

Government spending effectiveness depends critically on how it is financed. Using state-dependent SVAR models and local projections on post-war US data, we show that fiscal expansions financed with short-term debt generate significantly larger output multipliers than those financed with long-term debt. This difference mainly stems from private consumption responses: short-term financing crowds in consumption while long-term financing does not. To rationalize this finding, we construct an incomplete markets model in which households invest in short-term and long-term assets. Short assets provide liquidity/safety services; households can (more readily) use them to cover sudden idiosyncratic spending needs. An increase in the supply of these assets, through a short-term debt-financed government expenditure shock, boosts 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 fiscal multipliers differ substantially across financing modes, with short-term-financed shocks typically exceeding unity while long-term-financed shocks typically fall below unity. We show these differences persist across monetary and fiscal policy regimes, with important implications for optimal debt management and stimulus design.