Fragile New Economy: The Rise of Intangible Capital and Financial Instability
Charles A. Dice Center Working Paper No. 2018-19
63 Pages Posted: 25 Apr 2015 Last revised: 2 Feb 2019
Date Written: January 10, 2019
This paper analyzes the endogenous risk in economies where intangible capital is essential and its limited pledgeability induces firms' liquidity demand. Banks emerge to intermediate the liquidity supply by holding claims on firms' tangible capital and issuing deposits that firms hold to pay for intangible investment. A bubbly value of tangible capital arises and increases in banks' balance-sheet capacity. Its procyclicality induces firms' investment and savings waves, which feed into banks' risk-taking and amplify downside risks. The model produces stagnant crises and replicates several trends in the decades leading up to the Great Recession: (1) the rise of intangible capital; (2) the increase of firms' cash holdings; (3) the growth of financial intermediation; (4) the declining real interest rate; (5) the rising prices of collateral assets.
Keywords: Intangible Investment, Collateral Shortage, Liquidity Creation, Financial Intermediation, Endogenous Risk, Investment Waves, Savings Glut, Bubble
JEL Classification: D92, E10, E32, E41, E44, E51, G12, G20, G31
Suggested Citation: Suggested Citation