Aggregate external financing and savings waves |
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| Institution: | 1. University of California, Berkeley, Haas School of Business, 545 Student Services #1900, Berkeley, CA 94720-1900, USA;2. Northwestern University, Kellogg School of Management, 2100 Sheridan Road, Evanston, IL 60208, USA;1. Federal Reserve Bank of Philadelphia, 10 Independence Mall, Philadelphia, PA, USA;2. University of British Columbia, Vancouver School of Economics, 253-6000 Iona Drive, Vancouver, BC V6T 1L4, Canada |
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| Abstract: | US data display aggregate external financing and savings waves. Firms can allocate costly external finance to productive capital, or to liquid assets with low physical returns. If firms raise costly external finance and accumulate liquidity, either the cost of external finance is relatively low or the total return to liquidity accumulation, including its shadow value as future internal funds, is particularly high. We formalize this intuition by estimating a dynamic model of firms? financing and savings decisions, and use our model along with firm level data to construct an empirical estimate of the average cost of external finance from 1980 to 2014. |
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| Keywords: | Financial frictions Business cycles Financial shocks Cost of external finance Cash Corporate saving |
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