Counter-cyclical monetary policy, competition and growth: Firm-level evidence from the global financial crisis

While there is growing evidence of persistent or even permanent output losses from financial crises, the causes remain debated. One candidate is intangible capital. Investment in intangible assets is an increasingly important driver of economic growth but, being non-pledgeable as collateral, it is also potentially vulnerable to financial frictions. This also implies that counter-cyclical monetary policy could strengthen longer-term growth by sheltering intangible investment from adverse shocks, particularly where strong product market competition prevents firms from self-financing their investments through rents.

Using a large cross-country firm-level dataset and focusing on the global financial crisis and its aftermath, this paper finds strong support for these theoretical predictions. Specifically, we show that even within narrowly defined (4-digit) industries: i) firms that were more leveraged prior to the collapse of Lehman Brothers in September 2008 cut intangible investment more than their less leveraged counterparts in the subsequent years; ii) intangible investment cuts by leveraged firms were milder in countries where monetary conditions were more counter-cyclical post-Lehman, and in those (country-)industries where product market competition was weaker; iii) The mitigating impact of counter-cyclical monetary policy was larger in (country-) industries where competition was stronger. Importantly, these effects are either non-existent or weaker for physical capital investment, consistent with the notion that intangible investment is more exposed to financial frictions.

These findings are robust across alternative measures of balance sheet vulnerabilities, counter-cyclical macroeconomic (including fiscal) policies and competition. Our results highlight a complementary between pro-competition product market deregulation and counter-cyclical monetary policy in fostering intangible investment and growth.