‘Intangibles’ may be adding to long-run rate decline – BoE’s Haskel

The growing importance of intangible capital could be a factor in weak investment and the persistent decline of long-run rates in advanced economies, Jonathan Haskel said on February 11.

“Intangibles”, such as software or research, are increasingly taking the place of physical capital in modern economies, the Bank of England monetary policy committee member said during remarks at the University of Nottingham.

But loans cannot easily be secured against software, making it riskier for lenders to back this kind of investment. The economists Stephen Cecchetti and Kermit Schoenholtz have described this as the “tyranny of collateral”, Haskel noted.

If this is indeed a problem, “this will have reduced the demand for investment at a given safe interest rate and ultimately pushed down on the equilibrium interest rate, with all the resulting implications for monetary policy,” Haskel said.

This challenge is a priority for BoE policy-makers. Central bank officials have cited the UK’s weak investment performance in recent years as one cause of anaemic productivity growth, which in turn pushes down on long-run interest rates, making it harder for the central bank to “normalise” policy.

Policy sensitivity

Haskel said it was possible that an “intangible economy” would face weaker transmission of monetary policy, if firms were unable to borrow and therefore had to finance investment through retained earnings and equity.

But he said a countervailing factor was that borrowing constraints on intangible-intensive firms were more likely to be binding, and therefore changes in monetary policy would have a greater impact at the margin.

Recent work by BoE economists suggests the latter may be the most important factor. Research found that firms with higher “intangible intensity” changed their employment by the largest amount in response to a monetary policy shock.

More work is needed, Haskel said, but the results so far are “consistent with the idea that intangibles may indeed interact with collateral constraints, so that with more intangibles in the economy there is heightened sensitivity of firms to monetary policy”.

Beyond these short-run effects, Haskel said it was likely tangibles were affecting equilibrium interest rates. In the UK, investment demand failed to rise despite lower interest rates in the wake of the 2008 crisis. The spread between the risk-free rate and the return on capital has also risen.

Haskel said the growing importance of intangible capital appeared to fit these trends. Firms now demand less capital for any given safe rate, while the increased riskiness of intangible capital could explain why firms are having to pay more for their investments.

Haskel said it was important that the financial system “evolves and innovates” to keep up with the trend towards intangible assets. “A failure to do so could see a continuing low neutral rate of interest,” he warned.