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Macroeconomic Effects of Firms' Underspending in Times of Abundant Credit

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  • Issam Samiri

    (Birkbeck, University of 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.

Suggested Citation

  • Issam Samiri, 2021. "Macroeconomic Effects of Firms' Underspending in Times of Abundant Credit," BCAM Working Papers 2102, Birkbeck Centre for Applied Macroeconomics.
    • Handle: RePEc:bbk:bbkcam:2102
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    File URL: https://eprints.bbk.ac.uk/42575/1/42575.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    DSGE; Firms' spending; Financial Frictions; Productivity; Occasionally Binding Constraints; Dividends; Share buybacks; Great Recession;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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