Firms’ Precautionary Savings and Employment during a Credit Crisis
45 Pages Posted: 26 Nov 2019
Date Written: November 2019
Can the macroeconomic effects of credit supply shocks be large even when a small share of firms are credit-constrained? I use U.K. firm-level accounting data to discipline a heterogeneous-firm model in which the interaction between real and financial frictions induces precautionary cash holdings. In the data, firms increased their cash ratios during the last recession, and cash-intensive firms displayed higher employment growth. A tightening of firms’ credit conditions generates the same dynamics in the model. Unconstrained firms pre-emptively respond to credit supply shocks, and this precautionary channel crucially matters for the aggregate dynamics and the model fit with microeconomic data.
Keywords: financial frictions, precautionary savings, employment, heterogeneous firms
JEL Classification: E44, G01, G32, L25
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