Intangible Investment and Low Inflation: A Framework and Some Evidence

IMF Working Papers, September 18, 2020

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Title: Intangible Investment and Low Inflation: A Framework and Some Evidence
Authors: Subir Lall, Li Zeng
Date: September 18, 2020
Abstract summary:
- Intangible investment is growing as a share of economic activity.
- A simple framework incorporates the distinguishing characteristic of intangible investment: generally greater scalability and lower marginal costs than tangible investment.
- Evidence is shown that this may have contributed to more elastic aggregate supply in recent years, consistent with lower inflation and a flattening of the Phillips curve.
- The framework highlights channels through which technological change, a large constituent of intangible investment, may be leading to wage stagnation and greater market concentration.

Intangible investment growth:
- Intangible investment is growing as a share of economic activity.
Supply elasticity and inflation:
- Greater scalability and lower marginal costs associated with intangible assets may have contributed to more elastic aggregate supply in recent years.
- Increased supply elasticity is consistent with lower inflation and a flattening of the Phillips curve.
Labor market and market structure effects:
- Technological change, as a large component of intangible investment, may be leading to wage stagnation.
- Technological change may also be contributing to greater market concentration.

Distinguishing characteristic of intangible investment:
- Generally greater scalability.
- Lower marginal costs than tangible investment.
Channels emphasized:
- Impact on aggregate supply elasticity via scalability and marginal costs.
- Impact on wages through technological change.
- Impact on market concentration through returns to scale and technology-driven market dynamics.
Analytical context and concepts:
- AS-AD framework, aggregate supply curve, returns to scale, output gap.

Empirical relationship described:
- Evidence is presented that links the rise of intangible investment to more elastic aggregate supply, lower inflation, and a flatter Phillips curve.
Policy-relevant implications:
- Effects on inflation dynamics and monetary policy: lower inflation and a flattening Phillips curve have implications for inflation targeting and monetary policy design.
- Labor-market and competition policy considerations: wage stagnation and greater market concentration suggest relevance for labor and competition policies.
Subjects and keywords emphasized in the paper:
- Subjects: Import prices, Inflation, Inflation targeting, Intangible capital, Labor, Monetary policy, National accounts, Output gap, Prices, Production
- Keywords: aggregate supply supply curve, AS-AD framework, economy, Global, import price inflation, Import prices, inflation, inflation target, Inflation targeting, Intangible capital, intangible investment, investment, market concentration, Output gap, returns to scale, Technological change, unemployment, WP