Firm Liquidity and the Origins of Aggregate Fluctuations in a Network Economy

This paper investigates how microeconomic origins of liquidity shocks at the firm level influence aggregate output and financial stability in a network economy with inter-sectoral linkages. We use firm-level balance sheet data to construct two liquidity measures: the quick ratio, capturing firms’ internal short-term liquidity, and a network-based measure, capturing inter-sectoral network structure of liquidity flows derived from receivables and payables. Using sector-level aggregates, we apply a Structural Vector Autoregression (SVAR) model to examine the dynamic responses of GDP, the repo rates, the quick ratio, and the network measure to liquidity shocks. We further decompose forecast error variance to assess the relative contribution of each shock to business-cycle fluctuations. The main results indicate that the network effect is the dominant driver of businesscycle fluctuations, followed by the quick ratio, with both outweighing the remaining endogenous variables. The findings are relevant for macroprudential oversight, highlighting the importance of monitoring firms’ liquidity imbalances and network structure for financial stability and economic resilience.