Fragile New Economy: Intangible Capital, Corporate Savings Glut, and Financial Instability
Charles A. Dice Center Working Paper No. 2018-19
96 Pages Posted: 25 Apr 2015 Last revised: 4 Aug 2020
Date Written: July 28, 2020
Intangible-intensive firms in the U.S. hold an enormous amount of liquid assets that are in fact short-term debts issued by financial intermediaries. This paper builds a macro-finance model that captures this structure. A self-perpetuating savings glut emerges in equilibrium. As intangibles become increasingly important for production, firms hoard more liquidity to finance investments in intangibles with limited pledgeability. The resulting low interest rates induce intermediaries to increase leverage and bid up asset prices, which in turn encourages firms to invest more and hoard even more liquidity to fund expansion. Along these secular trends, endogenous risk accumulates in the financial system.
Keywords: Intangible Capital, Asset Shortage, Savings Glut, Liquidity Creation, Bubble, Endogenous Risk, Interest rate, Financial Intermediation
JEL Classification: D92, E10, E32, E41, E44, E51, G12, G20, G31
Suggested Citation: Suggested Citation