Abstract: Based on the data of 271 cities at prefecture level and above in China from 2013 to 2018, this paper constructs the city-level digital economy development index of China, and empirically tests the fact and mechanism of digital economy driving innovation development. It is found that digital economy can significantly promote regional innovation development, and this conclusion still holds after a series of robustness tests. The driving effect of digital economy on practical and exterior innovation is significantly stronger than that on invention innovation, and the innovation effect of digital economy has significant structural characteristics. Knowledge flow plays a significant mediating role in regional innovation development driven by digital economy, and the mediating effect of different types of innovation is different to some extent. The innovation effect of digital economy has significant regional differences. The innovation effect of digital economy in developed cities is significantly higher than that in backward cities. The mediating effect of knowledge flow in same-level cities is significantly higher than that in cross-level cities, and the mediating effect of knowledge flow in economically backward cities is significantly higher than that in economically developed cities. Digital economy can help "strong cooperation" and balanced development of urban innovation and development through the intermediary role of knowledge flow, and provide important policy basis for China to effectively implement innovation-driven development strategy and digital construction.