Financial Markets and R&D Investments: A Discrete Time Model to Interpret Public Policies

Abstract

The importance of financial deepening for economic development has been emphasized for some considerable time, since the seminal work by Schumpeter (1911), Goldsmith (1969), McKinnon (1973) and Shaw (1973). Kiyotaki and Moore (2005) provide a theoretical model explaining the long-run effects of financial deepening on output, investments and the interest rate, as well as circulation and use of different monetary instruments. Rajan and Zingales (1998) provide precise information on the nature of the causal nexus finance-growth, by performing empirical tests showing the importance of financial markets in allowing firms to raise external finance in a context of financial market imperfections. Finally, in the model by Aoki et al. (2006), the degree of development of the domestic financial system (together with international collateral constraints) determines whether capital liberalization causes capital outflow and transitional loss of wage and employment, or capital inflow and increase in wages and employment. Most of the related literature, however, focuses on the importance and role of financial markets for efficient resource allocation and the spreading of information.