Credit Constraints, FirmsPrecautionary Investment, and the Business Cycle

This paper studies the macroeconomic implications of \u85rmsprecautionary invest-ment behavior in response to expected future credit constraints. Firms increase their demand for liquid, safe and short-run investments in anticipation of future bor-rowing constraints, and this is shown to be at the source of a powerful ampli\u85cation channel of macroeconomic shocks. This mechanism increases our understanding of the "\u85 nancial accelerator " by focusing not only on the investment capacity of \u85rms, but also on the e¤ects of the expectation of future \u85nancial frictions on the will-ingness to invest and on the preference for the type of investment. I also show in a calibrated model that this mechanism is quantitatively signi\u85cant, and that it accounts for the observed business cycle patterns of the aggregate and \u85rm-level composition of investment, which are at odds with the existing models studying the macroeconomic implications of \u85nancial frictions, in which the expectation of future credit constraints does not inuence \u85rmscurrent actions directly