Capital misallocation and secular stagnation

The widespread emergence of intangible technologies in recent decades may have significantly hurt output growth -- even when these technologies replaced considerably less productive tangible technologies -- because of structurally low interest rates caused by demographic forces. This insight is obtained in a model in which intangible capital cannot attract external finance, firms are credit constrained, and there is substantial dispersion in productivity. In a tangibles-intense economy with highly leveraged firms, low rates enable more borrowing and faster debt repayment, reduce misallocation, and increase aggregate output. An increase in the share of intangible capital in production reduces the borrowing capacity and increases the cash holdings of the corporate sector, which switches from being a net borrower to a net saver. In this intangibles-intense economy, the ability of firms to purchase intangible capital using retained earnings is impaired by low interest rates, because low rates increase the price of capital and slow down the accumulation of corporate savings