Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197912 
Year of Publication: 
2018
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2018-59
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We document countercyclical corporate saving behavior with the degree of countercyclicality varying nonmonotonically with firm size. We then develop a dynamic stochastic general equilibrium model with heterogeneous firms to explain the pattern and study its implications for business cycles. In the presence of financial frictions and fixed operating costs, a persistent negative productivity shock signals low future income and prompts firms to hold more cash in order to preserve financial flexibility and maintain normal operations. This countercyclicality exhibits a hump-shaped relation to firm size. Compared with mediumsized firms, small firms have a higher marginal product of capital and thus better investment opportunities, which compete for resources with cash, while large firms have more pledgeable assets and demand less cash. We find that, on average, firms accumulate cash by cutting investment and employment in recessions, which reduces aggregate output and increases economic fluctuations. Corporate saving, therefore, amplifies aggregate shocks.
Subjects: 
Business fluctuations and cycles
Economic models
JEL: 
E20
E22
E32
G31
G32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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