Monetary and Fiscal Policy Regimes and Firm Innovation in Transition Economies and Residual Factors Explaining the Gap in Firm Innovation in Central Asian Economies

In this paper, we investigate the relationships between monetary and fiscal policy regimes and firm innovation in 25 transition economies. Using three waves of the Business Environment and Enterprise Performance Survey, we find that firm innovation increases with the inflation adjusted interest rate. Results also show that more stringent tax regimes lead to a decline in firm innovation. We then explore the factors attributable to the lag in innovative activities in the firms located in the Central Asian republics. We find that the current fiscal and monetary regimes actually reduce the gap between firm innovation in Central Asian and European transition economies. The residual gap can mainly be explained by differences in a variety of firm and country level characteristics.