Financial Crises and Innovation

53 Pages Posted: 9 Mar 2020

See all articles by Bryan Hardy

Bryan Hardy

Bank for International Settlements (BIS) - Monetary and Economic Department

Can Sever

International Monetary Fund (IMF)

Date Written: March 5, 2020

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

JEL Classification: E44, F30, G15, G21, O31

Suggested Citation

Hardy, Bryan and Sever, Can, Financial Crises and Innovation (March 5, 2020). BIS Working Paper No. 846, Available at SSRN: https://ssrn.com/abstract=3549545

Bryan Hardy (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Can Sever

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

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