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Intangible Capital, Corporate Earnings and the Business Cycle

  • Keqiang Hou
  • Alok Johri

Aggregate corporate profits are highly volatile and procyclical. Most dynamic general equilibrium models of the business cycle cannot deliver these basic features of the data. We develop a model of the U.S. economy in which firms expend resources to create intangible capital (IC), which is an additional input in their production technology. In keeping with the data, the model delivers profits that are many times more volatile than output. An estimated version of the model implies that IC investments are large and pro-cyclical. IC acts as a propaga- tion mechanism, generating inertial responses to shocks. Overall, the model fits the aggregate data much better than a model without IC.

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Paper provided by McMaster University in its series Department of Economics Working Papers with number 2009-17.

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Length: 56 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:mcm:deptwp:2009-17
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