Financial Reforms and Innovation: A Micro-Macro Perspective

46 Pages Posted: 5 May 2021

See all articles by Spyridon Boikos

Spyridon Boikos

University of Macedonia

Ioannis Bournakis

Middlesex University; American University in Cairo

Dimitris Christopoulos

Athens University of Economics and Business

Peter McAdam

European Central Bank (ECB)

Date Written: May 1, 2021

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

Suggested Citation

Boikos, Spyridon and Bournakis, Ioannis and Christopoulos, Dimitris and McAdam, Peter, Financial Reforms and Innovation: A Micro-Macro Perspective (May 1, 2021). ECB Working Paper No. 2021/2544, Available at SSRN: https://ssrn.com/abstract=3839529 or http://dx.doi.org/10.2139/ssrn.3839529

Spyridon Boikos (Contact Author)

University of Macedonia ( email )

156 Egnatia St.
P.O. 1591
Thessaloniki, 54006
Greece

Ioannis Bournakis

Middlesex University ( email )

The Burroughs
London, NW4 4BT
United Kingdom
02084115349 (Phone)

American University in Cairo ( email )

AUC Avenue
P.O. Box 74
New Cairo, 11835
Egypt
11835 (Fax)

Dimitris Christopoulos

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

Peter McAdam

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Eurotower
D-60311 Frankfurt am Main
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
33
Abstract Views
170
PlumX Metrics