While still limited, there is an increasing amount of literature on the impacts of balance sheet contraction, building on the experience of the Federal Reserve System’s balance sheet normalisation process in 2017-19. See Smith, A.L. and Valcarcel, V.J. (2020), “The Financial Market Effects of Unwinding the Federal Reserve’s Balance Sheet”, Research Working Papers, RWP 20-23, Federal Reserve Bank of Kansas City.
In the euro area, non-frontier productivity has overall stagnated in manufacturing since the early 2000s, and has even declined in the services sector.3 And this is where diffusion comes in. Put simply, markets are not setting the right incentives for non-frontier firms to invest in adopting, understanding and incorporating new technologies into their production process.