Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210756 
Year of Publication: 
2019
Series/Report no.: 
Staff Report No. 904
Publisher: 
Federal Reserve Bank of New York, New York, NY
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.
Subjects: 
financial frictions
precautionary savings
employment
heterogeneous firms
JEL: 
E44
G01
G32
L25
Document Type: 
Working Paper

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