Financial Shocks, Uncertainty Shocks, and Corporate Liquidity

ABSTRACT I estimate a structural VAR identified using sign restrictions to separately identify financial, macro uncertainty, and financial uncertainty shocks. The novelty of the estimation procedure relies on the qualitatively different response of corporate liquidity: Financial shocks lead firms to draw down their liquidity as they lose access to external finance, while uncertainty‐type shocks drive‐up liquid assets as a precautionary measure. While all three shocks have contractionary effects on the US economy, only macro uncertainty shocks trigger deflationary patterns. Existing theoretical frameworks can rationalize this finding.