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Financial shocks and the relative dynamics of tangible and intangible investment: Evidence from the euro area

Published online by Cambridge University Press:  01 August 2022

Johannes Gareis  and
Eric Mayer
Johannes Gareis*
Affiliation:
Deutsche Bundesbank, Frankfurt, Germany
Eric Mayer
Affiliation:
University of Würzburg, Würzburg, Germany
*
*Corresponding author. Email: johannes.gareis@bundesbank.de
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Abstract

We develop an extended real business cycle model with financially constrained firms and non-pledgeable intangible capital. Based on a model-consistent series for firms’ borrowing conditions, we find, within a structural vector autoregression framework, that, in response to an adverse financial shock, tangible investment falls more than intangible investment. This positive co-movement between tangible and intangible investment as well as the relative resilience of intangible investment pose a challenge for the theoretical model. We show that investment-specific adjustment costs help in reconciling the model with the observed empirical evidence. The estimation of the theoretical model using a Bayesian limited information approach yields support for the presence of much larger adjustment costs for intangible investment than for tangible investment.

Keywords

Tangible investmentintangible investmentfinancial shocks
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 5 , July 2023 , pp. 1455 - 1480
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

†

The views expressed in this paper are those of the author(s) and do not necessarily reflect the views of the Deutsche Bundesbank or the Eurosystem.

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