Working Paper: CEPR ID: DP10309
Authors: Philippe Bacchetta; Kenza Benhima; Cline Poilly
Abstract: In the aftermath of the U.S. financial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we document that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across firms. We develop a dynamic general equilibrium model where heterogenous firms need cash in their production process and where financial shocks are made of both credit and liquidity shocks. We show that external liquidity shocks generate a negative comovement between the cash ratio and employment. We analyze the dynamic impact of aggregate shocks and the cross-firm impact of idiosyncratic shocks. With a calibrated version of the model, the model yields a negative comovement that is close to the data.
Keywords: Financial shocks; Liquidity; Working capital
JEL Codes: E24; E44; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate cash ratio (G32) | employment (J68) |
| liquidity shocks (E44) | corporate cash ratio (G32) |
| liquidity shocks (E44) | employment (J68) |
| external liquidity shocks (F65) | cash ratio (G33) |
| external liquidity shocks (F65) | labor demand (J23) |
| cash ratio (G33) | wage obligations (J38) |