Financial reforms and innovation: A micro–macro perspective

Spyridon Boikos, Ioannis Bournakis, Dimitris Christopoulos and Peter McAdam ()

Journal of International Money and Finance, 2023, vol. 132, issue C

Abstract: We develop a horizontal R&D growth model to investigate the different channels through which financial reforms affect R&D investment and patent activity. First, a “micro” reform that abolishes barriers-to-entry in the banking sector leads to a decrease in lending rates which stimulates R&D investment and growth. Second, a “macro” reform that removes restrictions on banks’ reserves and credit controls. While this reform increases liquidity, it also increases the risk of default, potentially raising the cost of borrowing. This we dub the “reserves paradox” – this makes banks offset the rise in the default rate with a higher spread between loans and deposit rates. Thus our model suggests that whilst micro reforms boost innovation, macro reforms may appear negative. We find empirical support for these propositions using a sample of 21 OECD countries.

Keywords: Finance; Growth; Patents; Monitoring; Reserves paradox; Estimation (search for similar items in EconPapers)
JEL-codes: C23 E44 G2 O43 (search for similar items in EconPapers)
Date: 2023
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Related works:
Working Paper: Financial reforms and innovation: a micro-macro perspective (2021)
Working Paper: Financial Reforms and Innovation: A Micro-Macro Perspective (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:132:y:2023:i:c:s0261560623000219

DOI: 10.1016/j.jimonfin.2023.102820

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