The Impact of Intangible Investments on the Macroeconomy

This award funds research in macroeconomics that seeks to better understand the main driving forces behind the large decline in economic activity between 2008 ? 2009 and the subsequent slow recovery. The project seeks to shed light on a measurement issue that affects the analysis of key macro data from this period. If firms invest heavily in intangible investments, a drop in measured GDP will understand the actual decline in total output because measured GDP does not include all intangible investments. This could result in a rise in labor productivity during a recession, as observed in 2009. The project will develop a multisector framework that explicitly models intangible investments and industry input-output linkages and will use disaggregated data. The goal is to determine whether models of the business cycle that feature efficient resource allocation and fluctuations driven by shocks to total factor productivities can explain the economic experience of 2008 ? 2009. The results will help us understand whether or not inefficient disruptions in financial markets mean governments should regulate financial markets in new ways.

The project develops the multisector framework and estimates key model parameters with maximum likelihood techniques. Working with disaggregated data is very useful here, because there are vast differences in spending on R&D, trademarks, and other intangibles across industries, and including sectoral linkages will likely have an impact on the propagation of productivity shocks. The model will also be extended to allow for financial factors. Quantifying the role of intangible assets for business cycle activity will advance economic science in several ways. The current state of knowledge is limited because previous work has focused on aggregate data or a specific episode. The previous work was conducted prior to major revisions that introduced new measurements of intangible investments into the U.S. system of national accounts.