Macroeconomic Policy, Product Market Competition, and Growth: The Intangible Investment Channel

IMF Working Papers, February 7, 2020

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Canonical URL: Macroeconomic Policy, Product Market Competition, and Growth: The Intangible Investment Channel

Authors: JaeBin Ahn, Romain A Duval, Can Sever
Date: February 7, 2020
Core proposition: Intangible capital, being non-pledgeable as collateral, is vulnerable to financial frictions and may help explain persistent or permanent output losses from financial crises. Counter-cyclical macroeconomic policy can shelter intangible investment from financial shocks and strengthen longer-term growth, especially where strong product market competition prevents firms from self-financing investments through rents.
Empirical strategy: Uses a rich cross-country firm-level dataset and exploits heterogeneity in firm-level exposure to the sharp and unforeseen tightening of credit conditions around September 2008.
Quantitative conclusion: The paper finds strong support for the theoretical predictions and documents large quantitative implications, highlighting a powerful stabilizing role for macroeconomic policy through the intangible investment channel and its complementarity with pro-competition product market deregulation.

Intangible capital is a rising driver of economic growth and is non-pledgeable as collateral, increasing vulnerability to financial frictions.
Financial shocks (example analyzed: the sharp tightening around September 2008) disproportionately affect intangible investment.
Counter-cyclical macroeconomic policy can shelter intangible investment from financial shocks and materially support longer-term growth.
Strong product market competition amplifies the role of macro policy because competitive markets constrain firms’ ability to self-finance intangible investment via rents.
Empirical evidence from the cross-country firm-level dataset provides strong support for the theoretical predictions and indicates large quantitative effects.

Deploy counter-cyclical macroeconomic policy to protect intangible investment during financial shocks to support longer-term growth.
Complement macroeconomic stabilization with pro-competition product market deregulation to prevent firms from relying on rents to self-finance and to magnify the effectiveness of macro policy.
Recognize intangible investment as a key channel through which financial crises can produce persistent output losses and design policy frameworks accordingly.

Empirical focus: cross-country firm-level dataset (rich firm-level heterogeneity exploited).
Identification: heterogeneity in firm-level exposure to the sharp and unforeseen tightening of credit conditions around September 2008.
Subject tags included in the source: Commodity markets, Competition, Financial crises, Financial markets, Financial statements, Global financial crisis of 2008-2009, Public financial management (PFM).
Keywords listed in the source: balance sheet vulnerability, Commodity markets, Competition, coverage ratio, credit constraint, Financial frictions, Financial statements, Global, Global financial crisis of 2008-2009, Growth, Hysteresis, intangible asset investment, intangible investment, Intangible investment, leverage ratio, Monetary policy, Product Market, product market competition, WP.