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Framework for the Analysis of Research and Adoption Activities and their Macroeconomic Effects

Periodic Reporting for period 2 - FRAME (Framework for the Analysis of Research and Adoption Activities and their Macroeconomic Effects)

Reporting period: 2018-02-01 to 2019-03-31

In the context of demographic changes, environmental problems and climate change, globalization, innovation can help significantly in addressing each of these challenges. Yet we have little systematic knowledge about the impact of supporting public research and innovation policies. One reason for this deficiency is that conventional dynamic macroeconomic models have ignored innovation (both private and public). Furthermore, even the state-of-the-art models of R&D used for policy evaluation do not recognize that technologies need to be adopted by private companies and public institutions in order to generate benefits. Explicitly capturing the distinction between R&D and adoption is crucial to reliably assess the effects of innovation policies on macroeconomic variables. Policies mediating the diffusion of innovation are also poorly understood. The project aims at tackling these issues by looking at how fiscal and labour policies impact respectively technology adoption and productivity. In this respect, new methods are also developed to measure productivity across European countries.

These new models will provide a better understanding of the impact of EU innovation policies on over the short, medium and long term, and thereby achieve three of the specific impacts expected for this Action stipulated in the Call, Research and Innovation Action “CO-CREATION-08-2016/2017: Better integration of evidence on the impact of research and innovation in policy making”. Moreover, the introduction of two dimensions (e.g. the direction of technological change and the link with the labour market dynamics in Europe) goes beyond the call requirements in order to integrate the most relevant frame to draw policy conclusions from the project.
• WP1 develops the baseline DSGE model that allow us to study the role of public R&D and other public innovation activities in the creation of new technologies and in their rate of adoption by private companies. Work Package 1 demonstrates that public innovation in the form of any of our policies (direct investment or innovation subsidies) expand the economy in the medium term. We also show that their effects on the economy depend on the labour markets characteristics. We showed that a great degree of wage rigidities hide the aggregate trade-off generated by labor tax raises. Despite these trade-offs, the overall impact of innovation on the economy is positive.The contents of the baseline model have been presented in numerous internal FRAME events but also the workshop co-organized with MONROE.

• Work Package 2 introduces a multi-sector setting in which innovation and technology adoption is sector-specific. Subsidies to one sector have asymmetric eects over the other sectors. However, the existence of positive spillovers across sectors make the effect of subsidies persistent in the long-run which depends on the labour market characteristics. The effect of subsidies for technology adoption is symmetrical across sectors and depends on the elasticities of the technology to investment too.
The extension developed and explaining the structural innovative change occurring from manufacturing to services will be presented to numerous conferences, such as the NBER Summer Institute (July 2019).

• Work package 3 shows that educational policies interact signicantly with our features of endogenous growth: an increase to education subsidies increases investment in human capital. There is thereby more effective labor available to work at the same wage. Innovation policies interact with human capital by distorting the labor markets and the return to education. In our baseline calibration, public investment in adoption has a negative impact in the short run. The latter is the result of stimulating wages in the medium-run and, due to income effects the supply of labor falls, inducing a recession.

• Work Package 4 aims at understanding how technology adoption is influenced by fiscal policy. Work package 4 shows that innovation adoption suffers from austerity policies which slow down the former. The multi-country framework stresses that this detrimental effect are also transmitted to economies connected to the countries applying austerity measures. These findings complement what is find in Work Package 5 (see below) and were disseminated with a VoxColumn combined with the second policy brief. Moreover, key findings were presented during internal events (1st FRAME workshop and FRAME final conference). Submissions to international conferences are also planned for the next upcoming months.

• The contribution of Work Package 5 is twofold: first, it introduces new methods to estimate TFP measures for European countries and adjusting for utilization in input factors. The latter shows the limitations of existing methodologies which do not fit the European labour markets characteristics. Second, Work Package 5 provides an explanation of the heterogeneity of European countries to recover from the Great recession. Discount factors vis-a-vis productivity shocks represent a promising source of variation to explain fluctuations in unemployment. The key findings of WP5 were presented in internal FRAME events but also external ones (CoDE conference in May 2018 but also European Central Bank, May 2019 for example). Numerous presentations are planned over the next upcoming semesters in international conferences.

• WP6 focuses on estimating key elasticities parameters for innovation and adoption. Besides, WP6 develops a microeconomic study of public applied research in easing the adoption of technologies within firms. Easing the adoption of technologieswith applied public research leads to long-lasting effect on firm’s innovation and performances. The key findings were disseminated within a VoxColumn. Moreover, the related policy conclusions from this Work Package have been combined with the macro-conclusions from Work Package 1 in the first FRAME policy brief. The key conclusions were discussed within the Lunch Debate organized in Brussels in October 2018 and widely diffused within internal and external FRAME events.
This new generation of DSGE models aims firstly at deepening our current scientific understanding about the determinants of knowledge diffusion. The different results aim at providing the most accurate framework to design European edge-cutting policies to sustain innovation and growth. The latter have been illustrated in a video to communicate to non-scientific audience what are the key political implications of the FRAME project.

WP 2 goes beyond the DoA by proposing 2 distinct frameworks to study the impact of innovation in a multi-sector setting . WP4 is currently going further than the expected tasks by focusing on Spain to test the model developed. Its related spillover effects toward countries with more solid fiscal fundamentals, such as Germany, is also an unexpected contribution of the project. Finally, WP5 develops novel TFP methods fitting the characteristics of European countries is an important contribution to the literature and practitioners. This method will have an impact on the ongoing practices in ministries, and research international organizations who conduct forecast studies of productivity. Comparative analysis with the USA will be also possible with more accurate measures for each context.