Fragile New Economy: The Rise of Intangible Capital and Financial Instability
50 Pages Posted: 25 Apr 2015 Last revised: 16 Jun 2018
Date Written: February 28, 2018
Does the rise of intangible capital create financial instability? Firms hoard liquidity in the form of bank debt (e.g., deposits) for non-pledgeable intangible investments. This liquidity demand pushes down interest rate, giving banks a funding cost advantage, so banks bid up asset prices in booms as they grow. Higher asset prices induce firms to invest more in intangibles and hoard more liquidity, leading to an even lower interest rate and enabling banks to bid up asset prices even further. This paper models corporate savings glut that arises endogenously from the interaction between firms and banks in asset and money markets. The feedback mechanism explains several concurrent phenomena in the run-up to the Great Recession, and how endogenous risk accumulates in booms and materializes into severe and stagnant 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