Macroeconomic Effects of Firms' Underspending in Times of Abundant Credit

Issam Samiri

No 2102, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

Abstract: Firms typically decide their financing before starting the implementation of a new project. The firm's management may become more pessimistic about the project's profitability after financing is raised and reduce spending accordingly. Following an unpredicted negative aggregate productivity shock, the productive sector can enter a low spending mode, thus depressing output further. I use firm-level financial data to provide some empirical justification for this mechanism. I then study the mechanism in a general equilibrium model with money and a supply sector subject to uninsured idiosyncratic productivity shocks. The model reproduces many features of the post-2008 period: large effects of real shocks on output and investment, a less effective expansive monetary policy that is accompanied by high shareholders cash payouts.

Keywords: DSGE; Firms' spending; Financial Frictions; Productivity; Occasionally Binding Constraints; Dividends; Share buybacks; Great Recession (search for similar items in EconPapers)
JEL-codes: E32 E50 G35 (search for similar items in EconPapers)
Date: 2021-01
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