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

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.