Uncertainty shocks in an intangible economy

This paper studies uncertainty shocks in the context of an intangible economy. I build a two-sector dynamic stochastic general equilibrium (DSGE) model to understand a shift in investment composition and its implications for the transmission of uncertainty shocks. The model is motivated by the role of intangible capital as a cushion, mitigating the adverse effects of uncertainty on investment, as suggested by firm-level data. The quantitative analysis shows that heightened uncertainty directs resources toward the intangible sector, making the economy more intangible-intensive. The rising importance of intangibles diminishes aggregate volatility in the uncertainty-driven business cycle.