Macroeconomic Policy, Product Market Competition, and Growth

Abstract

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.

Born in Hard Times: Startups Selection and Intangible Capital During the Financial Crisis

“…Using detailed balance-sheet data for the census of Italian limited liability companies for 2005-17, we show that newly-born firms were more likely to adopt highly intangible, capital-saving technologies during the 2009-12 financial recession. Incumbents instead were less likely to invest in intangible assets, in line with previous findings (Ahn et al, 2018;Manaresi and Pierri, 2019). The newcomers that adopted a newer productive mix displayed significantly higher capital productivity, but only marginally higher total factor productivity.…”

Financial crises and innovation

“…Seeking to explain the persistent output decline, more recent efforts have shown that intangible capital and R&D spending falls for firms facing a credit crunch in a financial crisis, and that this fall can be persistent (Aghion, Askenazy, Berman, Cette, & Eymard, 2012;Ahn et al, 2018;de Ridder, 2019;Duval et al, in press;Peia, 2019). Such crises also lead to persistent declines in productivity (Duval et al, in press).…”

“…Ahn, Duval, and Sever (2018);Duval, Hong, and Timmer (in press) 2 Dell'Ariccia, Detragiache, andRajan (2008);Kroszner, Laeven, and Klingebiel (2007) 3Cerra and Saxena (2017) suggests that permanent output loss is a wider pattern for recessions generally, though financial crises tend to result in worse outcomes.4 See for instanceBaker, Bloom, and Davis (2016);Christiano, Eichenbaum, and Trabandt (2015); Gopinath, Kalemli-Özcan, Karabarbounis, and Villegas-Sanchez (2017); Reinhart, Reinhart, and Rogoff (2012);Stock and Watson (2012);Summers (2015).…”

Virtually Everywhere? Digitalisation and the Euro Area and EU Economies

“…See also European Commission (2011). 128 See Ahn, Duval and Sever (2020). This box looks at the relevance of intangible capital in terms of explaining the relationship between Tobin's Q and investment, focusing on explaining estimates of an investment gap.…”