The Impact of Intangible Investments on the Macroeconomy

As yet, there is no consensus among macroeconomists concerning the main driving forces behind the large declines in economic activity during 2008-2009 and the subsequent slow recovery. This paper seeks to shed light on a measurement issue that confounds analyses of key macrodata during this period. Because firms invest heavily in intangible investments---at a rate close to that of tangible investments---a drop in measured GDP, which does not include all intangible investments, understates the actual decline in total output. As a result, it is possible to have productivity rising during a recession as observed in 2008-2009. The rise in productivity has led many economists to the natural conclusion that this recession was different than most other post-World War II recessions and, as a result, many have been in search of evidence that financial disruptions were the cause of the large declines in real activity. The main objective of the paper is to determine if this time is in fact different by analyzing U.S. data---at the aggregate and micro level---using a model that incorporates intangible investments and multiple sectors, estimating parameters with maximum likelihood techniques, and comparing model predictions to data. Because of the inherent measurement issues, success relies on comparing model predictions to observations that are not used in the estimation of parameters.