Intangible Cycles

Shalini Mitra and Gareth Liu-Evans

No 2024-14, Working Papers from University of Liverpool, Department of Economics

Abstract: This paper investigates the role of an intangible investment technology shock in driving and propagating business cycles. In a dynamic general equilibrium framework with borrowing constrained entrepreneurs, we show that consumption smoothing by entrepreneurs, which is associated with reallocation of physical investment and hours from final goods to intangible investment, is the key mechanism through which aggregate co-movement arises in the model. The reallocation channel is especially strong in the presence of binding financial constraints. We use firm level intangible capital estimates to discipline the model and show that the entrepreneur’s degree of risk aversion, which determines their preference for consumption smoothing given their constant relative risk aversion (CRRA) utility, plays a key role in quantitatively generating the observed joint aggregate business cycle dynamics of output, consumption, investment and hours. For instance, entrepreneurs can display too little or too much risk aversion, in which case aggregate comovement is negated.

Keywords: Intangible investment shock; reallocation; intangible capital; business cycles; aggregate comovement (search for similar items in EconPapers)
JEL-codes: E13 E22 E32 O33 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2024-09-24
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ipr, nep-mac and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:liv:livedp:202414

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