This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Journal: Macroeconomics
  4. Forthcoming Articles
  5. Firms’ Precautionary Savings and Employment during a Credit Crisis

Firms’ Precautionary Savings and Employment during a Credit Crisis

  • Davide Melcangi
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

Can the macroeconomic effects of credit supply shocks be large even when a small share of firms is credit-constrained? I use UK firm-level accounting data to discipline a heterogeneous-firm model where the interaction between real and financial frictions induces precautionary cash holdings. In the data, firms increased their cash ratios during the Great 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; this precautionary channel, when appropriately quantified, crucially matters for the aggregate dynamics and firm-level patterns.

Downloads