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Credit constraints, firms׳ precautionary investment, and the business cycle

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  • Pérez-Orive, Ander

Abstract

Credit constrained firms prefer types of capital that generate significant pledgeable output and are liquid, since they loosen current and future credit constraints. Because pledgeability and liquidity are low for long-term firm-specific capital, a negative temporary aggregate productivity shock that tightens credit constraints creates a bias towards liquid short-term investments. This dampens the short-run negative output reaction to the shock, at the expense of strong medium-run propagation effects. This mechanism can create a short-run expansion when a future tightening in credit conditions is anticipated.

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  • Pérez-Orive, Ander, 2016. "Credit constraints, firms׳ precautionary investment, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 78(C), pages 112-131.
    • Handle: RePEc:eee:moneco:v:78:y:2016:i:c:p:112-131
    DOI: 10.1016/j.jmoneco.2016.01.006
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    2. Baldi, Guido & Bodmer, André, 2020. "Monetary and Macroprudential Policies in an Intangible Economy," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 53(3), pages 325-353.
    3. Gilbert Mbaraa & Ryszard Kokoszczyński, 2018. "Corporate governance, tax evasion and business cycles," Working Papers 2018-10, Faculty of Economic Sciences, University of Warsaw.
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    5. Baldi, Guido & Bodmer, André, 2020. "Monetary and Macroprudential Policies in an Intangible Economy," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 325-353.
    6. Jose Ignacio Lopez & Virginia Olivella, 2018. "The importance of intangible capital for the transmission of financial shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 223-238, October.

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