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

55 Pages Posted: 25 Apr 2015 Last revised: 14 Sep 2018

See all articles by Ye Li

Ye Li

Ohio State University

Date Written: September 7, 2018


Does the rise of intangible capital generate financial instability? Firms hoard liquidity in the form of bank debt (“deposits”) for non-pledgeable intangible investments. This liquidity demand pushes down the deposit rate, giving banks a funding cost advantage, so banks bid up asset prices in booms as their balance sheets expand. Higher asset prices induce firms to invest more in intangibles and hoard more liquidity, which in turn leads to an even lower interest rate, faster growing banks, and higher asset prices. This paper models corporate savings gluts that arise endogenously from the interaction between firms and banks in asset and money markets. It links several concurrent phenomena in the run-up to the Great Recession, and reveals how endogenous risk accumulates in asset prices during booms and materializes into stagnant crises. Government debt as another source of liquidity stimulates intangible investments and growth, but it cannot reduce asset price volatility or the frequency of banking crises.

Keywords: Intangible Investment, Inside Money, Financial Instability, Endogenous Risk

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 (September 7, 2018). 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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