Macroeconomic Effects of Public R&D

The direct public funding of R&D investment to stimulate technological innovation has a strong theoretical case and has gained renewed attention in the recent policy debate as a way to address the long-term challenges of modern society such as pandemics, climate change, and the transition to a low-carbon economy. We estimate the dynamic macroeconomic effects of government R&D investment and we find that it is very effective in fostering the total national innovation effort, crowding in private R&D investment, and in raising aggregate output in the long run. We also find that the public stimulus goes beyond private R&D activities and involves a very strong expansion of overall economic activity since the early periods. Finally, we uncover a strong positive impact of the private sector’s anticipation of public R&D spending, which can be interpreted as a confirmation of the importance of managing expectations to reduce the uncertainty inherent to R&D activities