Credit constraints, firms׳ precautionary investment, and the business cycle

Ander Pérez-Orive

Journal of Monetary Economics, 2016, vol. 78, issue C, 112-131

Abstract: Credit constrained firms prefer types of capital that generate significant pledgeable output and are liquid, since they loosen current and future credit constraints. Because pledgeability and liquidity are low for long-term firm-specific capital, a negative temporary aggregate productivity shock that tightens credit constraints creates a bias towards liquid short-term investments. This dampens the short-run negative output reaction to the shock, at the expense of strong medium-run propagation effects. This mechanism can create a short-run expansion when a future tightening in credit conditions is anticipated.

Keywords: Investment types; Financial frictions; Business cycles; Idiosyncratic risk; Firm heterogeneity (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:78:y:2016:i:c:p:112-131

DOI: 10.1016/j.jmoneco.2016.01.006

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