Macroeconomic modelling of R&D and innovation policies : an application of RHOMOLO and QUEST

The paper presents a spatial computable general equilibrium (SCGE) approach to policy impact assessment which is useful for capturing knowledge spillovers and spatial interactions between regions. First, the relationship between regional productivity and R&D expenditures is estimated econometrically by applying the catching-up framework of technology diffusion of Benhabib and Spiegel (2005) to EU regions. Second, the SCGE model RHOMOLO is combined with the dynamic stochastic general equilibrium (DSGE) model QUEST to simulate and assess the impact of research and innovation funding allocated by the 2014-2020 EU Cohesion Policy. Our simulation results suggest that in the short run the benefits of R&D policies are concentrated in the less developed regions. In the long run, however, the benefits spread throughout the EU, favouring also the more developed regions. In light of the empirical results, the paper identifies strengths and limitations of the adopted approach, and the advantages of aligning a spatially and sectorally disaggregated SCGE framework with the inter-temporal dynamics of DSGE models.