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The Macroeconomics of Firms' Savings

Viktoria Hnatkovska () and Roc Armenter ()

No 803, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: The U.S. non-financial corporate sector became a net lender vis-a-vis the rest of the economy in the early 2000s. We document this fact in the aggregate and firm-level data. We then develop a structural dynamic model with investment to study the firms' financing decisions. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity allows the firm to suspend distributions to shareholders when the cash flow is negative. Firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the large fraction of firms with net savings observed in the period 2000-2007. We also find that the rise in corporate savings over the past 40 years can be mostly attributed to a fall in the cost of equity relative to debt, driven by lower dividend taxes.

New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Date: 2012
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Working Paper: The macroeconomics of firms' savings (2011) Downloads
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