Firms’ Precautionary Savings and Employment during a Credit Crisis

Davide Melcangi

No 904, Staff Reports from Federal Reserve Bank of New York

Abstract: Can the macroeconomic effects of credit supply shocks be large even when a small share of firms are credit-constrained? I use U.K. firm-level accounting data to discipline a heterogeneous-firm model where the interaction between real and financial frictions induces precautionary cash holdings. In the data, firms increased their cash ratios during the last recession, and cash-intensive firms displayed higher employment growth. A tightening of firms’ credit conditions generates the same dynamics in the model. Unconstrained firms pre-emptively respond to credit supply shocks; this precautionary channel, when appropriately quantified, crucially matters for the aggregate dynamics and firm-level patterns.

Keywords: financial frictions; employment; heterogeneous firms; precautionary savings (search for similar items in EconPapers)
JEL-codes: E44 G01 G32 L25 (search for similar items in EconPapers)
Pages: 48
Date: 2019-11-01
Note: Revised July 2021.
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Firms' Precautionary Savings and Employment during a Credit Crisis (2024)
Working Paper: Firm’s precautionary savings and employment during a credit crisis (2016)
Working Paper: Firms’ precautionary savings and employment during a credit crisis (2016)
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