The Financing of Ideas and the Great Deviation

July 31, 2017

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Format: Chicago

Daniel Garcia-Macia. The Financing of Ideas and the Great Deviation, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Why did the Great Recession lead to such a slow recovery? I build a model where heterogeneous firms invest in physical and intangible capital, and can default on their debt. In case of default, intangible assets are harder to seize by creditors. Hence, intangible capital faces higher financing costs. This differential is exacerbated in a financial crisis, when default is more likely and aggregate risk bears a higher premium. The resulting fall in intangible investment amplifies the crisis, and gradual intangible spillovers to other firms contribute to its persistence. Using panel data on Spanish manufacturing firms, I estimate the model matching firm-level moments regarding intangibles and financing. The model captures the extent and components of the Great Recession in Spanish manufacturing, whereas a standard model without endogenous intangible investment would miss more than half of the GDP fall. A policy of transfers conditional on firm age could speed up the recovery, as young firms tend to be more financially constrained, particularly regarding intangible investment. Conditioning transfers on firm size or subsidizing credit (as in current E.U. policy) appears to be less effective.

Subject: Depreciation, Financial crises, Financial institutions, Global financial crisis of 2008-2009, Intangible capital, Labor, Manufacturing, National accounts, Stocks

Keywords: Constrained firm, Depreciation, Endogenous default, Europe, Exit rate, Exited firm, Financial crises, Firm exit, Firm financing, Firm level, Firm life-cycle pattern, Firm owner, Firms decision, Global, Global financial crisis of 2008-2009, Heterogeneous firms, Intangible capital, Intangible investment, Life-cycle growth, Physical capital, Repayment rate, Stocks, WP

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/176
Stock No:

WPIEA2017176
ISBN:

9781484311134
ISSN:

1018-5941

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