Innovation under pressure: decoding the tug-of-war between monetary and macroprudential policies

This study examines the effects of monetary policy, macroprudential policy, and their interaction on innovation, using panel data from 55 countries over 1999–2023. Empirical evidence indicates that contractionary monetary policy suppresses innovation, while tighter macroprudential policy fosters it. Notably, the adverse impact of monetary tightening on innovation—measured by research and development (R&D) expenditure and patent applications—is mitigated when macroprudential policy is concurrently tightened. These findings are robust across alternative innovation and policy measures and remain consistent after controlling for endogeneity using instrumental variables. The mitigating effect arises because macroprudential tightening helps stabilize financing conditions for productive activities, thereby preserving and countering the contraction of aggregate monetary liquidity typically induced by monetary policy. The magnitude of this interaction is conditioned by institutional context: it is stronger in high-income countries, weaker in monetary unions, attenuated by higher levels of democratization, and amplified by greater financial access. These results underscore the importance of coordinating monetary and macroprudential policies, while accounting for institutional factors, to effectively promote innovation.