MACRO: Innovation during Challenging Times; Professor Sarah Zubairy (Texas A&M University)

Abstract

When is receiving positive news regarding future technological advancements most impactful on the economy: during recessions or economic booms? A recession might represent an opportune time for investing in relatively cheaper, productivity- enhancing activities. However, tighter financial constraints during recessions might hinder the ability to secure funds for these activities. We explore this dichotomy by exploiting patent-based innovation shocks, which are constructed using changes in stock market valuations of firms that obtain patent grants. We find that aggregate patent-based innovation shocks have a greater impact on the economy during recessions, leading to a more significant increase in private investment. Additionally, our exploration of firm-level data uncovers supporting evidence that firms tend to boost their capital investment and R&D expenditures in response to these innovation shocks, particularly during recessions. The financial constraints of firms play a crucial role, with capital investments by firms with low default risk driving the larger impact observed during recessions.