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Intangible Capital, Relative Asset Shortages and Bubbles

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  • Stefano Giglio
  • Tiago Severo

Abstract

We analyze an overlapping generations economy with financial frictions and accumulation of both physical and intangible capital. The key difference between them is that intangible capital cannot be used as collateral for borrowing. As intangibles become more important in production, financial frictions tighten and equilibrium interest rates decline, creating the conditions for the emergence of rational bubbles. We also analyze the question of dynamic efficiency, demonstrating that, in the presence of financial frictions, neither the interest rate test nor the test proposed by Abel et al. (1989) are appropriate. Finally we show that, in general, rational bubbles are not Pareto improving in our framework.
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Suggested Citation

  • Stefano Giglio & Tiago Severo, 2011. "Intangible Capital, Relative Asset Shortages and Bubbles," Levine's Working Paper Archive 786969000000000121, David K. Levine.
  • Handle: RePEc:cla:levarc:786969000000000121
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    3. Rocheteau, Guillaume & Rodriguez-Lopez, Antonio, 2014. "Liquidity provision, interest rates, and unemployment," Journal of Monetary Economics, Elsevier, vol. 65(C), pages 80-101.
    4. Bidian, Florin, 2016. "Robust bubbles with mild penalties for default," Journal of Mathematical Economics, Elsevier, vol. 65(C), pages 141-153.
    5. Gregory Thwaites, 2014. "Why are real interest rates so low? Secular stagnation and the relative price of investment goods," Discussion Papers 1428, Centre for Macroeconomics (CFM).
    6. Mr. Ehsan Ebrahimy, 2019. "Liquidity Choice and Misallocation of Credit," IMF Working Papers 2019/284, International Monetary Fund.
    7. Stefano Giglio & Matteo Maggiori & Johannes Stroebel, 2016. "No‐Bubble Condition: Model‐Free Tests in Housing Markets," Econometrica, Econometric Society, vol. 84, pages 1047-1091, May.
    8. Tomohiro Hirano & Noriyuki Yanagawa, 2017. "Asset Bubbles, Endogenous Growth, and Financial Frictions," Review of Economic Studies, Oxford University Press, vol. 84(1), pages 406-443.
    9. Amir Kermani & Yueran Ma, 2020. "Asset Specificity of Non-Financial Firms," NBER Working Papers 27642, National Bureau of Economic Research, Inc.
    10. Mitra, Shalini, 2019. "Intangible capital and the rise in wage and hours volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 70-85.
    11. Andrea Caggese & Ander Perez, 2017. "Capital Misallocation and Secular Stagnation," Finance and Economics Discussion Series 2017-009, Board of Governors of the Federal Reserve System (U.S.).
    12. Dietrich, Diemo & Hauck, Achim, 2014. "Bank capital regulation, loan contracts, and corporate investment," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 230-241.
    13. Mitra, Shalini, 2018. "Intangible Capital and the Rise in Wage and Hours Volatility," MPRA Paper 89697, University Library of Munich, Germany.
    14. Bidian, Florin, 2015. "Portfolio constraints, differences in beliefs and bubbles," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 317-326.

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