The Financing of Ideas and the Great Deviation

53 Pages Posted: 5 Sep 2017

See all articles by Daniel Garcia-Macia

Daniel Garcia-Macia

International Monetary Fund (IMF) - European Department

Date Written: July 2017


Why did the Great Recession lead to such a slow recovery? I build a model whereheterogeneous firms invest in physical and intangible capital, and can default on their debt. Incase of default, intangible assets are harder to seize by creditors. Hence, intangible capitalfaces higher financing costs. This differential is exacerbated in a financial crisis, whendefault is more likely and aggregate risk bears a higher premium. The resulting fall inintangible investment amplifies the crisis, and gradual intangible spillovers to other firmscontribute to its persistence. Using panel data on Spanish manufacturing firms, I estimate themodel matching firm-level moments regarding intangibles and financing. The model capturesthe extent and components of the Great Recession in Spanish manufacturing, whereas astandard model without endogenous intangible investment would miss more than half of theGDP fall. A policy of transfers conditional on firm age could speed up the recovery, as youngfirms tend to be more financially constrained, particularly regarding intangible investment.Conditioning transfers on firm size or subsidizing credit (as in current E.U. policy) appears tobe less effective.

Keywords: Western Hemisphere, Financial crises, Financial crises, Intangible capital, United States, heterogeneous firms, endogenous default

JEL Classification: E22, G01, G32

Suggested Citation

Garcia-Macia, Daniel, The Financing of Ideas and the Great Deviation (July 2017). IMF Working Paper No. 17/176, Available at SSRN:

Daniel Garcia-Macia (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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