Firms’ Precautionary Savings and Employment during a Credit Crisis

45 Pages Posted: 26 Nov 2019

See all articles by Davide Melcangi

Davide Melcangi

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: November 2019

Abstract

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

Suggested Citation

Melcangi, Davide, Firms’ Precautionary Savings and Employment during a Credit Crisis (November 2019). FRB of New York Staff Report No. 904, November 2019. Available at SSRN: https://ssrn.com/abstract=3493310 or http://dx.doi.org/10.2139/ssrn.3493310

Davide Melcangi (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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