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<p>This paper examines how monetary policy and institutional quality jointly affect innovation and long-term economic growth. We develop a dynamic general equilibrium model in which firms allocate resources to R&amp;D, influenced by interest rates, inflation, and institutional efficiency. The model shows that lower interest rates and stable prices encourage R&amp;D by improving liquidity and reducing financing costs, but their impact is significantly enhanced when institutions are strong and governance is effective. Numerical simulations reveal that weak institutions and inflationary environments hinder R&amp;D and growth, while sound monetary policy and institutional reforms reinforce each other. By highlighting these interactions, the paper offers practical insights for policymakers seeking to promote sustainable, innovation-led development. Our findings emphasize the importance of aligning monetary tools with institutional improvements to maximize long-term growth outcomes.</p>

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How monetary policy and institutions shape R&D: a dynamic general equilibrium approach

  • 期刊论文

  • 出版模式：

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  • 发表日期：

    2026年2月3日

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  • Óscar Afonso

摘要

This paper examines how monetary policy and institutional quality jointly affect innovation and long-term economic growth. We develop a dynamic general equilibrium model in which firms allocate resources to R&D, influenced by interest rates, inflation, and institutional efficiency. The model shows that lower interest rates and stable prices encourage R&D by improving liquidity and reducing financing costs, but their impact is significantly enhanced when institutions are strong and governance is effective. Numerical simulations reveal that weak institutions and inflationary environments hinder R&D and growth, while sound monetary policy and institutional reforms reinforce each other. By highlighting these interactions, the paper offers practical insights for policymakers seeking to promote sustainable, innovation-led development. Our findings emphasize the importance of aligning monetary tools with institutional improvements to maximize long-term growth outcomes.