The impact of U.S. monetary policy on Chinese firms’ innovation

Abstract

We construct a simple theoretical model to emphasize the external demand channel through which the monetary policy of the United States (U.S.) impacts the innovation decisions of Chinese manufacturing firms. The model predicts that a contractionary U.S. monetary policy depresses Chinese firms’ innovation. We then empirically test this demand-channel spillover effect of the U.S. monetary policy on Chinese firms, and find that firms in an industry that has more export exposure to the U.S. would decrease innovation more during the period of U.S. contractionary monetary policy. In particular, this innovation depressing effect is stronger for firms with low productivity or private ownership.