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

96 Pages Posted: 25 Apr 2015 Last revised: 4 Aug 2020

See all articles by Ye Li

Ye Li

Ohio State University

Date Written: July 28, 2020

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 (July 28, 2020). 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: https://ssrn.com/abstract=2598182 or http://dx.doi.org/10.2139/ssrn.2598182

Ye Li (Contact Author)

Ohio State University ( email )

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

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

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