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Firms’ Precautionary Savings and Employment during a Credit Crisis

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  • Davide Melcangi

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 in which 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, and this precautionary channel crucially matters for the aggregate dynamics and the model fit with microeconomic data.

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  • Davide Melcangi, 2019. "Firms’ Precautionary Savings and Employment during a Credit Crisis," Staff Reports 904, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:904
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    Cited by:

    1. Gabriel Chodorow-Reich & Antonio Falato, 2017. "The Loan Covenant Channel: How Bank Health Transmits to the Real Economy," NBER Working Papers 23879, National Bureau of Economic Research, Inc.
    2. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R., 2018. "Financial constraints in search equilibrium: Mortensen Pissarides meet Holmstrom and Tirole," Labour Economics, Elsevier, vol. 50(C), pages 144-155.
    3. Davide Melcangi, 2018. "The Marginal Propensity to Hire," 2018 Meeting Papers 807, Society for Economic Dynamics.

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    More about this item

    Keywords

    financial frictions; employment; heterogeneous firms; precautionary savings;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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