The Working Capital Credit Multiplier
60 Pages Posted: 16 Nov 2017 Last revised: 12 May 2021
Date Written: May 5, 2021
We propose and analyze a new mechanism through which financial frictions can affect firms’ operations and economic activity: the working capital credit multiplier. To isolate this multiplier, we develop an identification strategy that builds on cash flow seasonality and allows us to identify funding frictions in working capital without employing pure financial shocks. Our analysis provides evidence that some firms have limited capacity to fund working capital investments, which constraints their production capacity. This mechanism furthers our understanding of how funding frictions amplify and propagate the effects of economic shocks.
Keywords: financial accelerator, seasonality, funding frictions, accounts payable, short-term financial planning
JEL Classification: G31, G32, G38, E32
Suggested Citation: Suggested Citation