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The importance of intangible capital for the transmission of financial shocks

Jose Lopez () and Virginia Olivella Moppett

Review of Economic Dynamics, 2018, vol. 30, 223-238

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)

Keywords: Financial shocks; Intangible assets; Business cycles; Employment volatility (search for similar items in EconPapers)
JEL-codes: E24 E32 E44 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.red.2018.04.004

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