Financial shocks and the relative dynamics of tangible and intangible investment: Evidence from the euro area

We develop an extended real business cycle model with financially constrained firms and non-pledgeable intangible capital. Based on a model-consistent series for firms' borrowing conditions, we find, within a structural vector autoregression framework, that, in response to an adverse financial shock, tangible investment falls more than intangible investment. This positive co-movement between tangible and intangible investment as well as the relative resilience of intangible investment pose a challenge for the theoretical model. We show that investment-specific adjustment costs help in reconciling the model with the observed empirical evidence. The estimation of the theoretical model using a Bayesian limited information approach yields support for the presence of much larger adjustment costs for intangible investment than for tangible investment.