IMF Working Papers

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

Author/Editor:

JaeBin Ahn ; Romain A Duval ; Can Sever

Publication Date:

February 7, 2020

Electronic Access:

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Summary:

While there is growing evidence of persistent or even permanent output losses from financial crises, the causes remain unclear. One candidate is intangible capital – a rising driver of economic growth that, being non-pledgeable as collateral, is vulnerable to financial frictions. By sheltering intangible investment from financial shocks, counter-cyclical macroeconomic policy could strengthen longer-term growth, particularly so where strong product market competition prevents firms from self-financing their investments through rents. Using a rich cross-country firm-level dataset and exploiting heterogeneity in firm-level exposure to the sharp and unforeseen tightening of credit conditions around September 2008, we find strong support for these theoretical predictions. The quantitative implications are large, highlighting a powerful stabilizing role for macroeconomic policy through the intangible investment channel, and its complementarity with pro-competition product market deregulation.

Series:

Working Paper No. 2020/025

Subject:

Commodity markets Competition Financial crises Financial markets Financial statements Global financial crisis of 2008-2009 Public financial management (PFM)