This dissertation consists of two chapters of my work on macro-finance and innovation. In particular, it studies the impact of the dynamic process of credit reallocation on aggregate innovative activities. The first chapter introduces the main focus of my dissertation. In addition, it reviews the literature and discusses the contribution of this dissertation.The next chapter builds a model to draw out theoretical predictions. In the model economy, borrowing firms choose whether to innovate or retain a mature technology, while lenders decide their allocation of credit. The credit market is characterized with financial and matching frictions and investigates the consequences of lenders' credit reallocation decisions on borrowers' innovation choices. We posit that the innovation process is time consuming (e.g. due to the length of R&D projects). The different amount of time needed for production with the new and old technology exposes lenders to a liquidity risk. The analysis shows that lenders tend to reallocate credit when they face liquidity risks. We show that an intensification of the credit reallocation process improves the matching between lenders and innovative firms but, overall, it disrupts innovation activities.The final chapter empirically investigates the impact of credit reallocation on innovation and tests the predictions from the model. We use a novel data set on bank balance sheets and the number of patents in Italian (a bank-centered country) local markets (provinces) during a period of great economic growth and tighter banking regulation. We construct measures of credit reallocation following the established literature on job reallocation and examine their effect on innovation. To address the concerns about the endogeneity of credit reallocation in the provinces, we exploit indicators of the geographical diversity of the 1936 Italian Banking regulation. We then estimate a two-stage model that in the first stage projects the rate of credit reallocation in a province onto an indicator of tightness of the banking regulation in the province and in the second stage projects the measure of innovation (the number of patents) onto the value of credit reallocation in the province defined by the tightness of local banking regulation. Consistent with the predictions of the model, we find that an increase in credit reallocation depresses innovative activity while aggregate credit growth helps to expand it. Furthermore, we show that our results are robust across empirical specifications, and carry through when controlling for a broad battery of province characteristics or altering the estimation period.
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