R&D Investment and Financial Stability

We examine the relationship between a country’s level of investment in research and development (R&D) and financial stability. Our findings emphasize the importance of a balanced fiscal strategy that reconciles the urgency of short-term fiscal consolidation with the pursuit of long-term economic growth and productivity. Using causal mediation analysis, we evaluate both the direct impact of R&D spending on financial stability and the indirect effects mediated through government expenditure. The results reveal that while total R&D spending, including public and private contributions, directly and significantly enhances financial stability, an increase in total public expenditure—arising from higher R&D investment while holding other components of government spending constant—counterbalances this positive effect. Thus, when both direct and indirect pathways are considered, the overall causal impact is nonsignificant. These findings highlight the need for policymakers to prioritize R&D investment while carefully managing other areas of public spending to safeguard financial stability. They also underscore the critical role of private R&D investment in financial stability. A strategic fiscal framework is essential to balance innovation-driven investments with fiscal discipline, supporting long-term economic resilience and growth.