Banking crises and investments in innovation
44 Pages Posted: 11 Apr 2016 Last revised: 2 Dec 2017
Date Written: December 1, 2017
This paper proposes a new channel to explain the medium- to long-term effects of banking crises on the real economy. It embeds a banking sector prone to runs in a stylized growth model to show that episodes of bank distress affect not only the volume, but also the composition of firm investment, by disproportionally decreasing investments in innovation. This hypothesis is confirmed empirically employing industry-level data on R&D spending around 13 recent banking crises episodes. Using difference-in-difference identification strategies, I show that industries that depend more on external finance, in more bank-based economies, invest disproportionally less in R&D following systemic banking crises. These industries also have a lower share of R&D spending in total investment, suggesting a shift in the composition of investment that is specific to recessions following banking crises and not other business cycle recessions.
Keywords: banking crises, R&D investment, economic growth, global games
JEL Classification: G01, G21, E22
Suggested Citation: Suggested Citation