Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/234098 
Year of Publication: 
2021
Series/Report no.: 
ECB Working Paper No. 2544
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
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.
Subjects: 
Finance
Growth
Patents
Monitoring
Reserves Paradox
Estimation
JEL: 
G2
C23
E44
O43
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4544-8
Document Type: 
Working Paper

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