Fragile New Economy: The Rise of Intangible Capital and Financial Instability
Charles A. Dice Center Working Paper No. 2018-19
55 Pages Posted: 25 Apr 2015 Last revised: 14 Sep 2018
Date Written: September 7, 2018
Does the rise of intangible capital generate financial instability? Firms hoard liquidity in the form of bank debt (“deposits”) for non-pledgeable intangible investments. This liquidity demand pushes down the deposit rate, giving banks a funding cost advantage, so banks bid up asset prices in booms as their balance sheets expand. Higher asset prices induce firms to invest more in intangibles and hoard more liquidity, which in turn leads to an even lower interest rate, faster growing banks, and higher asset prices. This paper models corporate savings gluts that arise endogenously from the interaction between firms and banks in asset and money markets. It links several concurrent phenomena in the run-up to the Great Recession, and reveals how endogenous risk accumulates in asset prices during booms and materializes into stagnant crises. Government debt as another source of liquidity stimulates intangible investments and growth, but it cannot reduce asset price volatility or the frequency of banking crises.
Keywords: Intangible Investment, Inside Money, Financial Instability, Endogenous Risk
JEL Classification: D92, E10, E32, E41, E44, E51, G12, G20, G31
Suggested Citation: Suggested Citation