Wednesday, December 11, 2019 | 2:00pm-3:30pm | Room 337, HSBC Business School Building

Abstract

We empirically document that firms save hard during \rainy" days with the degree of countercyclicality varying non-monotonically with firm size. We then develop a dynamic stochastic general equilibrium model with heterogeneous firms to explain the pattern and study its implications for business cycles. In the presence of financial frictions and fixed operating costs, a persistent negative productivity shock signals low future income, and prompts firms to hold more cash in order to maintain normal operations. This countercyclicality of cash saving exhibits a hump-shaped relation to firm size. Compared with medium-sized firms, small firms have a higher marginal product of capital and thus better investment opportunities which compete for resources with cash, while large firms have more pledgeable assets and demand less cash. We find that, on average, firms accumulate cash by cutting investment in recessions, which reduces aggregate output and increases economic fluctuations. Corporate saving, therefore, amplifies aggregate shocks.