Policy Seminar on Policies to Stimulate Innovation

Wednesday, October 26, 2011
George Shultz Conference Room, Herbert Hoover Memorial Building

PARTICIPANTS

Andrew Atkeson, John Cogan, Stephen Haber, Bob Hall, Dan Kessler, Stephen Langlois, Ronald McKinnon, John Raisian, John Shoven, John Taylor, Ian Wright

ISSUES DISCUSSED

Andrew Atkeson, professor of economics of University of California, Los Angeles (UCLA) and the Federal Reserve Bank of Minneapolis, discussed his work with Ariel Burstein on the aggregate impact and effectiveness of policies to stimulate the macro economy. He discussed the relative effectiveness of corporate taxes, subsidies, and other policies in encouraging innovation by firms, whether stimulation per dollar of such policies can be measured, when enacting such policies is sensible, and the impact of such policies on aggregate innovation, output and welfare.

Atkeson began by arguing the key margin to consider with regard to the aggregate impact of innovation policies is the decision of the firms to enter or exit the market. He argues this margin is perfectly elastic in the long run and therefore is the decision where adjustments are made in response to policy in a long-run general equilibrium. Thus, to measure the influence of a policy to stimulate growth, one need only measure the influence of that policy on firms’ decisions to enter the marketplace.

Atkeson also stated policy effects on long-run aggregates and welfare depend on the magnitude of spillovers. He demonstrated this with a quantitative example from their model including a spillover of “learning by doing,” meaning that firms become more efficient at doing their tasks over time, but do not internalize this completely and so other firms also benefit.

Atkeson concluded by arguing the aggregate impact of a policy is proportional to the policy’s fiscal impact, that the short-run impact of a change in innovation policy is not very sensitive to spillovers while the long-run impact is, and that estimating the magnitude of long-run social returns to innovation is difficult.

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