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Macroeconomic instability and the incentive to innovate

Masino, Serena (2012): Macroeconomic instability and the incentive to innovate.

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This paper investigates the channels through which macroeconomic instability prevents or hinders innovative investment undertakings financed by the domestic private sector. The analysis is based on a sample of 48 countries, representing all levels of development, and it estimates various measures of macroeconomic instability, such as political, real and monetary volatility. The results suggest a negative impact of instability on the share of R&D financed by the business sector. These outcomes highlight the desirability of counter-cyclical policy interventions aiming to prevent the avoidance or abandonment of private R&D undertakings in unstable macroeconomic environments.

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