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Credit Constraints, Firms' Precautionary Investment, and the Business Cycle

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  • Ander Perez

    (Universitat Pompeu Fabra)

Abstract

This paper studies the macroeconomic implications of firms' precautionary real investment behavior in response to the anticipation of future financing constraints. Firms increase their demand for liquid and safe but low-return investments in anticipation of future borrowing constraints in order to decrease the probability of having to forego future profitable investment opportunities. I show in a calibrated model that this behavior is at the source of a novel and powerful amplification channel of macroeconomic shocks. Furthermore, it can account for the observed business cycle patterns of the aggregate and firm-level composition of real investment, a set of observations which is at odds with the existing models studying the macroeconomic implications of financial frictions, in which the expectation of future credit constraints does not directly affect firms' current actions.

Suggested Citation

  • Ander Perez, 2010. "Credit Constraints, Firms' Precautionary Investment, and the Business Cycle," 2010 Meeting Papers 1004, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:1004
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