This work analyzes how credit constraints affect firms' investment decisions along the different phases of the economic cycle. It estimates the effect of credit supply shocks on capital accumulation for the period 1997-2012, and assesses whether firms can mitigate this effect by substituting bank credit with internal liquidity.
A contraction in bank credit supply of 1 percentage point causes an average decline of around 0.6 points in the corporate investment rate. The effect is stronger during recessions. If hit by a negative credit shock during expansions, firms use internal liquidity to sustain their investments. In recessions, instead, liquidity does not help to absorb the shock, possibly for precautionary motives.
