NBER WP version here: www.nber.org/papers/w34041

We take the model to U.S. data and find that it matches the estimated responses well.

We also provide empirical evidence supporting the model mechanisms using market-implied patent values and inventor-level data.

Many thanks for reading, comments are very welcome #EconSky!

Full paper 👇

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In general equilibrium, this effect is reinforced through labor market reallocation.

🧑‍🔬Lower wages of skilled workers during recessions reduce the cost of green R&D, raising green labor demand and increasing green innovation.

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Main channel operating during green transition, as economy moves from few to many green production inputs: "Green is in the future"

💲Green innovation generates profits that are heavily backloaded, making it less sensitive to short-term business cycle fluctuations

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What can explain the differential cyclicality of innovation?

⚙️We develop a medium-run business cycle model with endogenous green and non-green innovation.

👉 Flesh out key mechanisms driving innovation over the business cycle

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Next, we link patent filings to 🇺🇸 Compustat firms and confirm the empirical results.

The green share actually increases within the average firm, while overall patenting declines.

Many more robustness checks in the paper, e.g. international evidence, unlisted firms, etc.

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What drives the increase in the green patent share following the monetary tightening?

📉Number of non-green patents declines

📈But: number of green patents also increases significantly

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🏦 To sharpen identification, we focus on monetary policy shocks.

Monetary tightening (by 25 bp) confirms overall patenting is procyclical, but green share is countercyclical

➕Comparable effects suggest separate discount rate channel plays only a limited role

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We estimate simple local projections: How does a negative “innovation” in GDP growth (by 1%) affect patenting activity over time in 🇺🇸?

📉We find that aggregate innovation declines

📈But: the share of green innovation goes up!

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📝To measure innovation, we rely on the universe of patent filings across the U.S. and OECD countries between 1986-2019.

🪴We classify green patents linked to climate change mitigation and adaptation using a standard definition by the OECD.

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Fostering green innovation is a key part of the climate policy toolkit across the world.

But: recent global economic headwinds raise concern that a business cycle downturn could slow the green transition

👉 How does green innovation respond to the business cycle?

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