Financial reforms and innovation: a micro-macro perspective

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

No 2544, Working Paper Series from European Central Bank

Abstract: We develop a horizontal R&D growth model that allows us 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 produces a straightforward result: a decrease in lending rates which stimulates R&D investment and economic 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 test and find empirical support for these propositions using a sample of 21 OECD countries. JEL Classification: G2, C23, E44, O43

Keywords: estimation; finance; growth; monitoring; patents; reserves paradox (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-cba, nep-cwa and nep-fdg
Note: 50336
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Related works:
Journal Article: Financial reforms and innovation: A micro–macro perspective (2023)
Working Paper: Financial Reforms and Innovation: A Micro-Macro Perspective (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212544

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