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Fragile New Economy: The Rise of Intangible Capital and Financial Instability

Ye Li
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Ye Li: Ohio State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: This paper analyzes the endogenous risk in economies where intangible capital is essential and its limited pledgeability induces firms' liquidity demand. Banks emerge to intermediate the liquidity supply by holding claims on firms' tangible capital and issuing deposits that firms hold to pay for intangible investment. A bubbly value of tangible capital arises and increases in banks' balance-sheet capacity. Its procyclicality induces firms' investment and savings waves, which feed into banks' risk-taking and amplify downside risks. The model produces stagnant crises and replicates several trends in the decades leading up to the Great Recession: (1) the rise of intangible capital; (2) the increase of firms' cash holdings; (3) the growth of financial intermediation; (4) the declining real interest rate; (5) the rising prices of collateral assets.

JEL-codes: D92 E10 E32 E41 E44 E51 G12 G20 G31 (search for similar items in EconPapers)
Date: 2019-01
New Economics Papers: this item is included in nep-acc, nep-ban, nep-hme and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2018-19

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