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Banking Crises and Investments in Innovation

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  • Oana Peia

Abstract

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. Thishypothesis 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.

Suggested Citation

  • Oana Peia, 2017. "Banking Crises and Investments in Innovation," Working Papers 201727, School of Economics, University College Dublin.
    • Handle: RePEc:ucn:wpaper:201727
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    File URL: http://hdl.handle.net/10197/9101
    File Function: First version, 2017
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    Cited by:

    1. Stolbov, Mikhail & Shchepeleva, Maria, 2020. "What predicts the legal status of cryptocurrencies?," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 273-291.
    2. Schmitz, Tom, 2021. "Endogenous growth, firm heterogeneity and the long-run impact of financial crises," European Economic Review, Elsevier, vol. 132(C).
    3. Oana Peia & Davide Romelli, 2019. "Did bank lending stifle innovation in Europe during the Great Recession?," Working Papers 201926, School of Economics, University College Dublin.
    4. Hardy, Bryan & Sever, Can, 2021. "Financial crises and innovation," European Economic Review, Elsevier, vol. 138(C).

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    More about this item

    Keywords

    Banking crises; R&D investment; Financial dependence; Global games;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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