Overview
This series explains how financial conditions reach firms through two linked but distinct paths: consumer credit changes expected sales and their dispersion, while corporate liquidity determines whether wages, inventories, supplier prepayments, and receivables can be financed before payment arrives. Capacity constraints and risk-averse hiring turn wider demand outcomes into uneven employment and output; network links transmit liquidity stress to connected firms. Federal Reserve model results and BIS firm evidence support a conditional framework, not one jointly estimated effect or universal forecast.
Learning outcomes
- Financial tightening can lower expected demand and widen the distribution of firm sales.
- Capacity constraints can make customer-credit changes alter hiring risk, not only sales levels.
- Working-capital liquidity determines whether firms can bridge production costs and incoming payment.
- Supplier and customer links can transmit liquidity stress beyond the directly exposed firm.
- The Federal Reserve and BIS studies support complementary mechanisms, not a universal forecast.
Keywords
Preview every chapter · Unlock full text, audio, and video from chapter 4
PlansFAQ
How can tighter consumer credit increase firm-level uncertainty?
Tighter consumer credit can widen sales-per-worker outcomes when customer matching is uneven and production capacity caps output.
Why can firms cut hiring when expected demand remains positive?
Firms can cut hiring when risk-averse owners must pay wages before customer demand is realized and cannot fully insure the downside; net worth affects their buffer.
What is money elasticity in corporate finance?
Money elasticity is a firm’s ability to draw an overdraft or committed credit line to pay obligations before sales cash arrives, subject to bank terms and limits.
How do financial shocks spread through production networks?
Financial shocks can spread when a liquidity-constrained supplier cuts output or trade credit, disrupting downstream customers; reported BIS estimates find clearer upstream-to-downstream spillovers.