Intangible Capital, Relative Asset Shortages and Bubbles

39 Pages Posted: 20 Dec 2011

See all articles by Stefano Giglio

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Tiago Severo

International Monetary Fund (IMF)

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Date Written: November 2011

Abstract

We analyze an overlapping generations economy with financial frictions and accumulation of both physical and intangible capital. The key difference between them is that intangible capital cannot be used as collateral for borrowing. As intangibles become more important in production, financial frictions tighten and equilibrium interest rates decline, creating the conditions for the emergence of rational bubbles. We also analyze the question of dynamic efficiency, demonstrating that, in the presence of financial frictions, neither the interest rate test nor the test proposed by Abel et al. (1989) are appropriate. Finally we show that, in general, rational bubbles are not Pareto improving in our framework.

Keywords: Asset prices, Bonds, Capital, Capital markets, Developed countries, Economic models, Financial assets

Suggested Citation

Giglio, Stefano and Severo, Tiago, Intangible Capital, Relative Asset Shortages and Bubbles (November 2011). IMF Working Paper No. 11/271, Available at SSRN: https://ssrn.com/abstract=1974839

Stefano Giglio

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tiago Severo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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