Melcangi, Davide Maria; (2018) Essays on the macroeconomics of firm dynamics and financial frictions. Doctoral thesis (Ph.D), UCL (University College London).

Abstract

This thesis studies the link between firm-level financial frictions and employment decisions, and how it matters for the propagation of aggregate shocks. The second chapter exploits the idea that, when financial constraints bind, firms adjust employment in response to cash flow shocks. I label this response the marginal propensity to hire. I exploit a novel combination of three large micro datasets in the UK and a novel source of variation to identify cash flow shocks from changes to the business rates, a tax paid by UK businesses on the properties they occupy. I find that financial frictions severely constrain labour demand. On average, for every additional £1 of cash flow, as much as 39 pence are spent on employment. Small and more leveraged firms display greater marginal propensities to hire. The third chapter uses the empirical evidence on the marginal propensity to hire to motivate and discipline a model with heterogeneous firms and financial frictions. The model builds intuition on the drivers of the endogenous tightness of financial constraints and links it with structural parameters. Once calibrated to the empirical micro evidence, the model generates a large and prolonged fall in aggregate employment and output following a tightening of credit conditions. The fourth chapter shows that the macroeconomic effects of credit supply shocks can be large even in an economy in which the share of credit-constrained firms is small. Using UK firm-level balance sheet data, I document that firms hoarded cash relative to their assets during the recession, and that cash-intensive firms cut their workforces by less. I then build a heterogeneous-firm model in which the interaction between real and financial frictions endogenously generates precautionary cash holdings. A calibrated version of the model is able to reproduce the stylised facts when simulating a tightening of credit conditions.

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