The Bank of England published a staff working paper finding that access to cash flow-based borrowing, where credit is extended against earnings rather than collateral, limits the effect of monetary tightening on research and development. Using data on 895 U.S. firms with sustained R&D activity from 1997 to 2017, the authors find that a 25 basis point contractionary shock reduces R&D by about 1% at its peak. Firms without access to cash flow-based borrowing cut R&D by about 1.8 percentage points more in the first year than firms with access, despite similar declines in cash flow and no comparable difference in physical investment. A model linking financing conditions, innovation and productivity estimates that the same tightening pushes output about 1% below its previous trend at the peak and leaves a persistent loss of 0.12%. Extending cash flow-based borrowing to all firms reduces this lasting loss by about 30%, although most remains because higher real interest rates lower returns to innovation across firms. The burden is concentrated among younger firms without access, which produce about three times as many patents and more than four times as many breakthrough patents as borrowers. The paper argues that R&D support targeted at these firms would protect productivity more effectively than a uniform subsidy.
2026-09-04Bank of England
Bank of England research finds cash flow-based borrowing cushions innovation and output from monetary tightening
Bank of England staff research finds that firms without access to cash flow-based borrowing cut R&D substantially more after monetary tightening. A model estimates that a 25 basis point tightening leaves output persistently 0.12% below trend, with universal access to such borrowing reducing the loss by about 30%. The effects fall disproportionately on younger firms that produce more and higher-quality patents.