Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations

Thomas Drechsel

No 16975, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Microeconomic evidence reveals a direct link between firms' current earnings and their access to debt. This paper studies macroeconomic implications of earnings-based borrowing constraints. In a macro model, firms with earnings-based constraints borrow more in response to positive investment shocks, whereas firms with collateral constraints borrow less. Empirically, aggregate and firm-level credit responds to identified investment shocks according to the predictions with earnings-based constraints. Moreover, with sticky prices earnings-based constraints imply that supply shocks are quantitatively more important. This is validated in an estimated version of the model, highlighting the importance of carefully modeling credit constraints to understand policy tradeoffs.

Keywords: Collateral constraints; Loan covenants; Cash flow-based lending; Financial frictions; Investment-specific shocks; Sticky prices (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 G32 (search for similar items in EconPapers)
Date: 2022-01
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Related works:
Journal Article: Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations (2023)
Working Paper: Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations (2018)
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