Financial Reforms and Innovation: A Micro-Macro Perspective

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

Discussion Paper Series from Department of Economics, University of Macedonia

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” reformthat 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.

Keywords: Finance; Growth; Patents; Monitoring; Reserves Paradox; Estimation.Conventional DEA Efficiency. (search for similar items in EconPapers)
JEL-codes: C23 E44 G2 O43 (search for similar items in EconPapers)
Date: 2021-06, Revised 2021-06
New Economics Papers: this item is included in nep-ban and nep-mac
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http://econwp.uom.gr/pdf/dp082021.pdf

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:mcd:mcddps:2021_08

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