Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/318170 
Authors: 
Year of Publication: 
2021
Series/Report no.: 
BCAM Working Paper No. 2102
Publisher: 
Birkbeck, University of London, Birkbeck Centre for Applied Macroeconomics (BCAM), London
Abstract: 
Firms typically decide their financing before starting the implementation of a new project. The firm's management may become more pessimistic about the project's profitability after financing is raised and reduce spending accordingly. Following an unpredicted negative aggregate productivity shock, the productive sector can enter a low spending mode, thus depressing output further. I use firm-level financial data to provide some empirical justification for this mechanism. I then study the mechanism in a general equilibrium model with money and a supply sector subject to uninsured idiosyncratic productivity shocks. The model reproduces many features of the post-2008 period: large effects of real shocks on output and investment, a less effective expansive monetary policy that is accompanied by high shareholders cash payouts.
Subjects: 
DSGE
Firms' spending
Financial Frictions
Productivity
Occasionally Binding Constraints
Dividends
Share buybacks
Great Recession
JEL: 
E32
G35
E50
Document Type: 
Working Paper

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