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

Fingerprint

Financing
Multiplier
Credit
Working capital
Economic shocks
Oil price shocks
Permanent shock
Economic activity
Friction

Keywords

  • Credit Multiplier
  • Working Capital
  • Financing Frictions

Cite this

Understanding the Credit Multiplier : The Working Capital Channel. / Almeida, Heitor; Carvalho, Daniel R.; Kim, Taehyun.

2017.

Research output: Working paper

@techreport{d61ee98147a441e18b45cb7b38b9f40f,
title = "Understanding the Credit Multiplier: The Working Capital Channel",
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.",
keywords = "Credit Multiplier, Working Capital, Financing Frictions",
author = "Heitor Almeida and Carvalho, {Daniel R.} and Taehyun Kim",
year = "2017",
month = "11",
day = "16",
doi = "10.2139/ssrn.3071018",
language = "English (US)",
type = "WorkingPaper",

}

TY - UNPB

T1 - Understanding the Credit Multiplier

T2 - The Working Capital Channel

AU - Almeida, Heitor

AU - Carvalho, Daniel R.

AU - Kim, Taehyun

PY - 2017/11/16

Y1 - 2017/11/16

N2 - 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.

AB - 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.

KW - Credit Multiplier

KW - Working Capital

KW - Financing Frictions

U2 - 10.2139/ssrn.3071018

DO - 10.2139/ssrn.3071018

M3 - Working paper

BT - Understanding the Credit Multiplier

ER -