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The importance of intangible capital for the transmission of financial shocks

Author

Listed:
  • Jose Ignacio Lopez

    (Universidad de los Andes)

  • Virginia Olivella

    (Banque de France)

Abstract

This paper studies the role of intangible capital in the transmission of financial shocks in a general equilibrium model with two types of capital, tangible and intangible, and labor and financial frictions. We find that intangible capital, which cannot be used by financially constrained entrepreneurs as collateral, is key to generate labor market volatility in response to financial shocks. When hit by an adverse financial shock, entrepreneurs prioritize investment in pledgeable assets to offset the tightening of financial conditions. This results in a strong cutback in intangible investment, which in turn leads to a decline in the marginal product of labor, vacancies and employment. In an alternative specification—one without intangible capital—when hit by an adverse financial shock, entrepreneurs instead fund tangible investments by reducing their consumption. As a result, capital and the marginal product of labor fall less than in the model with intangible assets, resulting in a smaller decline of employment and output. (Copyright: Elsevier)

Suggested Citation

  • Jose Ignacio Lopez & Virginia Olivella, 2018. "The importance of intangible capital for the transmission of financial shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 223-238, October.
  • Handle: RePEc:red:issued:17-331
    DOI: 10.1016/j.red.2018.04.004
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    Cited by:

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    2. Zhang, Haiping, 2022. "Upstream financial flows, intangible investment, and allocative efficiency," Journal of Macroeconomics, Elsevier, vol. 72(C).
    3. Gareis, Johannes & Mayer, Eric, 2020. "Financial shocks and the relative dynamics of tangible and intangible investment: Evidence from the euro area," Discussion Papers 39/2020, Deutsche Bundesbank.
    4. Mehmet Furkan Karaca, Mehmet Furkan Karaca & Minetti, Raoul & Murro, Pierluigi, 2022. "Credit Reallocation and Technological Change," Working Papers 2022-6, Michigan State University, Department of Economics.
    5. Minjie Deng & Chang Liu, 2021. "Sovereign Risk and Intangible Investment," Discussion Papers dp21-16, Department of Economics, Simon Fraser University.
    6. Matthew Knowles, 2023. "Capital Deaccumulation and the Large Persistent Effects of Financial Crises," ECONtribute Discussion Papers Series 218, University of Bonn and University of Cologne, Germany.
    7. Baldi, Guido & Bodmer, André, 2020. "Monetary and Macroprudential Policies in an Intangible Economy," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 325-353.

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    More about this item

    Keywords

    Financial shocks; Intangible assets; Business cycles; Employment volatility;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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