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  3. American Economic Journal: Macroeconomics
  4. April 2023
  5. Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations

Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations

  • Thomas Drechsel
American Economic Journal: Macroeconomics
vol. 15, no. 2, April 2023
(pp. 1-34)
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Abstract

Microeconomic evidence reveals a direct link between firms' current earnings and their access to debt. This paper studies macroeconomic implications of earnings-based borrowing constraints. In a macro model, firms with earnings-based constraints borrow more in response to positive investment shocks, whereas firms with collateral constraints borrow less. Empirically, aggregate and firm-level credit responds to identified investment shocks according to the predictions with earnings-based constraints. Moreover, with sticky prices, earnings-based constraints imply that supply shocks are quantitatively more important. This is validated in an estimated version of the model, highlighting the importance of carefully modeling credit constraints to understand policy trade-offs.

Citation

Drechsel, Thomas. 2023. "Earnings-Based Borrowing Constraints and Macroeconomic Fluctuations." American Economic Journal: Macroeconomics, 15 (2): 1-34. DOI: 10.1257/mac.20210099

Additional Materials

JEL Classification

  • E22 Investment; Capital; Intangible Capital; Capacity
  • E32 Business Fluctuations; Cycles
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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