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

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  • Gareis, Johannes
  • Mayer, Eric

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.

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  • Gareis, Johannes & Mayer, Eric, 2023. "Financial shocks and the relative dynamics of tangible and intangible investment: Evidence from the euro area," Macroeconomic Dynamics, Cambridge University Press, vol. 27(5), pages 1455-1480, July.
    • Handle: RePEc:cup:macdyn:v:27:y:2023:i:5:p:1455-1480_11
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