Fragile New Economy: The Rise of Intangible Capital and Financial Instability

63 Pages Posted: 25 Apr 2015 Last revised: 2 Feb 2019

See all articles by Ye Li

Ye Li

Ohio State University

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

Li, Ye, Fragile New Economy: The Rise of Intangible Capital and Financial Instability (January 10, 2019). Columbia Business School Research Paper No. 15-46; Fisher College of Business Working Paper No. 2018-03-019; Charles A. Dice Center Working Paper No. 2018-19. Available at SSRN: or

Ye Li (Contact Author)

Ohio State University ( email )

Fisher Hall 836, 2100 Neil Ave
Columbus, OH 43210
United States


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