Macroprudential Policy and Innovation: Evidence from European Countries

We examine the effect of macroprudential policy on innovation across 21 European countries from 1990 to 2021. Using 401,755 patents linked to 2,844 firms, we find that macroprudential tightening reduces both the quantity and quality of innovation. One standard deviation increase in the overall macroprudential policy index is associated with approximately a 10.1 percent decline in patent count and an 8.4 percent decline in adjusted forward citations. The effect is persistent and robust across three identification strategies: a multi-way fixed effects specification, an instrumental variable approach, and a difference-in-differences design exploiting the implementation of the European Union’s macroprudential “single rulebook†(CRR/CRD IV). The effect operates through the credit channel, is amplified for financially constrained firms, and is driven by credit-oriented, borrower-targeted, and credit cycle-smoothing instruments. Financial resilience-building instruments deliver no short term cost and possibly generate positive innovation effects at long horizons. The findings suggest that the macroprudential toolkit carries differentiated economic costs across instrument categories.