Liquidity, Intangibles and Stagnation

Princeton University, Princeton NJ

Investigators

Abstract

The project will investigate the interaction between financial frictions, growth and fluctuations. The particular focus is on intangible capital. The objective of the current award is to investigate the causes and consequences of financial crises. Through this project, we try to understand better the interaction between financial intermediation, balance sheet adjustment and aggregate production before, during and after financial crises, in order to improve public policies. By developing a macroeconomic model with financial intermediaries that incorporates anticipated and realized bank runs, our framework would improve our understanding of crisis events as well as point out the limitations of predicting crises. Our analysis of balance sheet adjustment includes both financial and real assets (such as tangible and intangible capital), providing insight into how a financial crisis may lead to slower growth and a rise in inequality. The project develops frameworks which would be useful for public policy making as well as teaching. The results of the project would emphasize the importance of intangible capital accumulation, the complementary role of financial and macroeconomic stability, and recommend that policy makers take an eclectic approach to the issue of financial stability and stagnation. The work will be carried out jointly with John Moore, Shengxing Zhang, Mark Gertler, Andrea Prestipino, Kosuke Aoki, and Gianluca Benigno. The project with John Moore and Shengxing Zhang investigates the implications of the limited commitment of entrepreneurs for the horizons of external financiers, intangible capital accumulation, growth and business cycles. The project with Shengxing Zhang examines the long-run effects of financial friction on the accumulation of skills on the job, inequality and stagnation. The project with Mark Gertler and Andrea Prestipino builds a macroeconomic model of banking that incorporates financial accelerators and rollover risk to examine financial crises, while the project with Kosuke Aoki and Gianluca Benigno modifies such framework to examine financial and macro stability of emerging market economies. The proposed project addresses questions such as: (1) Why do certain countries experience a long stagnation after a financial crisis? (2) What are the sources of financial instability? Do they have to do with contractual incompleteness, or to do with the limited number and net worth of participants in the asset markets? (3) How should government conduct monetary, financial, and fiscal policies to ameliorate financial crises and improve welfare? This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.