Fragile New Economy: Intangible Capital, Corporate Savings Glut, and Financial Instability

94 Pages Posted: 25 Apr 2015 Last revised: 28 Nov 2022

See all articles by Ye Li

Ye Li

University of Washington - Foster School of Business

Date Written: November 10, 2022

Abstract

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

Li, Ye, Fragile New Economy: Intangible Capital, Corporate Savings Glut, and Financial Instability (November 10, 2022). Columbia Business School Research Paper No. 15-46, Charles A. Dice Center Working Paper No. 2018-19, Fisher College of Business Working Paper No. 2018-03-019, Available at SSRN: https://ssrn.com/abstract=2598182 or http://dx.doi.org/10.2139/ssrn.2598182

Ye Li (Contact Author)

University of Washington - Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States

HOME PAGE: http://https://yeli-macrofinance.com/

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