Understanding the Credit Multiplier: The Working Capital Channel

Heitor Almeida, Daniel R. Carvalho, Taehyun Kim

Research output: Working paper

Abstract

We provide novel evidence that frictions in the financing of working capital can lead firms to significantly amplify and propagate the effect of economic shocks over time. We propose a new approach to identify this firm credit multiplier that compares how a same firm responds to permanent shocks differently when these shocks are initiated in the period in which they are predicted to be most profitable (their “main quarter”). Our analysis implements this test with oil price shocks and provides extensive evidence supporting our identification strategy. Our results suggest that the financing of working capital can be an important channel for understanding how the credit multiplier affects economic activity.
Original languageEnglish (US)
DOIs
StatePublished - Nov 16 2017

Keywords

  • Credit Multiplier
  • Working Capital
  • Financing Frictions

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