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Financial Crises and Innovation

Bryan Hardy and Can Sever

No 846, BIS Working Papers from Bank for International Settlements

Abstract: Financial crises are accompanied by permanent drops in economic growth and output. Technological progress and innovation are important drivers of economic growth. This paper studies how financial crises affect innovative activities. Using cross-country panel data on patenting at the industry-level, we identify a financial channel whereby disruptions in financial markets impact patenting activity. Specifically, we find that patenting decreases more following banking crises for industries that are more dependent on external finance. This financial channel is not at play during currency crises, sovereign debt crises, or recessions more generally, suggesting that disruption in banking activity matters for investment in innovative activities. The effect on patenting is economically large and long-lasting, resulting in less patenting, in terms of both total quantity and quality, for 10 years or longer after a banking crisis. The average patent quality, however, does not appear to decline. We show the results are not likely to be driven by reverse causality or omitted variables. These findings provide a link between banking crises and the observed patterns of lower long-term growth. Liquidity support in the aftermath of banking crises appears to help reduce the effects through the financial channel over the short term.

Keywords: innovation; financial crises; banking crises; patents; growth (search for similar items in EconPapers)
JEL-codes: E44 F30 G15 G21 O31 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2020-03
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-ino, nep-ipr, nep-mac and nep-sbm
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