Intangible assets and monetary policy

Intangible assets and the transmission of monetary policy

In the 1970s intangible investment was under half of tangible investment, now it exceeds tangible investment. This shift is associated with changes in corporate financing and investment patterns. For example, research shows that firms with more intangible assets use less debt and invest mostly from internal funds due to the lower collateral value of intangible assets. In addition, intangible investment responds less than tangible investment to changes in corporate valuation, and intangible assets depreciate faster than tangible ones.

Given these changes, Döttling and Ratnovski, in this paper, analyze how corporate intangible capital affects monetary policy transmission. To that end, they examine how the stock price of firms with more intangible capital responds to monetary policy announcements as well as how  intangible investments respond to monetary policy over horizons of multiple quarters. They use aggregate intangible investment data from the National Income and Product Accounts of the U.S. Bureau of Economic Analysis and firm-level data for US public firms are sourced from Compustat.

They find that while a 25bp increase in the 1-year Treasury rate is associated with a tangible investment decline of 3% to 6% after 12 quarters (in firm-level and aggregate data, respectively),  intangible investment declines by less than 1%. They conclude that intangible assets weaken the transmission of monetary policy to investment particularly among financially constrained firms.

Monetary Policy and Intangible Investment
Authors: Robin Döttling, Lev Ratnovski
From:  Erasmus University Rotterdam, ECB

Has intangible investment contributed to the flattening of the Phillips curve?

Intangible investment has four properties that have important economic consequences:

• Sunkenness: Intangible investment usually imply heavy sunk costs because it is highly customized.
• Scalability: Due to their nonphysical nature, intangible assets can be in more than one place at the same time.
• Synergies: Intangible investment often combines with other tangible and intangible investment to produce greater efficiencies or  new products.
• Spillovers: Many intangible assets are non-rivalrous, for example design is such an investment that can simultaneously benefit many producers of similar products.

Lall and Zend in this paper use the database on intangible investment developed by Corrado, Hulten and Sichel (“Measuring Capital and Technology: An Expanded Framework” 2005)- extended to cover all countries with available information from the Intangible Capital Database with the exception of Greece – to examine whether the rising importance of intangible capital can help  explain the flattening of the AS curve.

Their results indicate that in all the sample countries, except the UK, higher shares of intangible capital are associated with flatter AS curves. The intuition behind their conclusion is that intangible capital, because of its high scalability, tends to lower the marginal cost of production and therefore makes producers more sensitive to price changes—the very essence of a flattened AS curve.
Intangible Investment and Low Inflation: A Framework and Some Evidence
Authors: Subir Lall, Li Zeng
From: IMF