How stimulative are low real interest rates for intangible capital?

Abstract

We study theoretically and empirically how the increase in the intensity of intangible capital in production in recent decades affects the sensitivity of investment to interest rates. In contrast to tangible capital, intangible capital has low collateral value and must be financed in a larger part with accumulated corporate savings, especially in more financially constrained firms and for more lumpy investments. High-intangibles firms are, therefore, more likely to be net savers in equilibrium, and for such firms low interest rates are not as stimulative as for high-tangibles firms. We show in a realistically calibrated model that the rise of intangible capital substantially dampens the positive effects of low interest rates on investment because of this mechanism, increasing the misallocation of resources. We find strong empirical support for this effect by studying the investment decisions of U.S. firms.