Firms’ precautionary savings and employment during a credit crisis

Davide Melcangi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Can the macroeconomic effects of credit supply shocks be large even in an economy in which the share of credit-constrained firms is small? I address this question using a model with firm heterogeneity, in which the interaction between real and financial frictions gives rise to precautionary cash holdings. Using UK firm-level balance sheet data, I show that firms hoarded cash relative to their assets during the last recession, and cash-intensive firms cut their workforces by less. A quantitative version of the model, disciplined by these data, generates similar dynamics in response to a tightening of firms’ credit conditions. The simulated economy experiences a sizeable fall in aggregate employment and prolonged substitution from capital to cash. Most of the aggregate dynamics are driven by unconstrained firms, pre-emptively responding to changes in credit conditions, in anticipation of future idiosyncratic productivity shocks. The model’s ability to generate predictions in line with the data crucially relies on this precautionary channel.

Keywords: financial frictions; precautionary savings; employment; heterogeneous firms (search for similar items in EconPapers)
JEL-codes: E44 G32 L25 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2016-03-07
New Economics Papers: this item is included in nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://eprints.lse.ac.uk/86237/ Open access version. (application/pdf)

Related works:
Journal Article: Firms' Precautionary Savings and Employment during a Credit Crisis (2024)
Working Paper: Firms’ Precautionary Savings and Employment during a Credit Crisis (2019)
Working Paper: Firm’s precautionary savings and employment during a credit crisis (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:86237

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