Aggregate Implications of Innovation Policy

Andrew Atkeson, Consultant

Ariel Burstein

November 2017 | Federal Reserve Bank of Minneapolis Staff Report 459

We examine the quantitative impact of policy-induced changes in innovative investment by firms on growth in aggregate productivity and output in a model that nests several of the canonical models in the literature. We isolate two statistics that play a key role in shaping the model’s predicted response of aggregate productivity, output, and welfare to a policy-induced change in the innovation intensity of the economy. Given estimates of these statistics, we find that there is only modest scope for increasing aggregate productivity and output over a 20-year horizon with uniform subsidies to firms’ investments in innovation of a reasonable magnitude, but the welfare gains from such a subsidy can be substantial.