Intangible Capital Formation, International Equity Investments, and Output Synchronization

We analyze the eects of intangible investment on international out- put synchronization. Using a dynamic stochastic general equilibrium model, we nd that an increase in the importance of intangible cap- ital leads to a higher degree of output comovement across countries. Therefore, countries in which intangible capital is more important are better suited to economic integration, such as forming a monetary union. This oers an insightful perspective on the potential relation between the considerable dierences in intangible capital among Euro- zone members and the discussion surrounding the Eurozone as a sub- optimal currency area. A high stock of intangible capital also tends to attract foreign equity investments, in particular foreign direct in- vestments. We nd that cross-border equity holdings in tangible and intangible capital further increase the degree of output synchroniza- tion. Our results imply that policy reforms to incentivize higher intan- gible capital formation and cross-border equity investments may not only foster economic growth but also improve the functioning of the monetary policy in the Eurozone.